Bank of England Markets Director Paul Fisher said recent volatility sparked by the Federal Reserve’s comments on tapering its quantitative-easing program was a “sensible correction” and may continue.
“Spillovers from the U.S. to the U.K. mean that I expect we’ll continue to get volatility as the U.S. exits from its QE,” Fisher told lawmakers in Parliament in London. “We’re now seeing the market trying to find new levels. I’m not sure that adjustment has fully worked through yet. But they were right to re-price.”
The BOE policymaker, who has been voting for more QE in recent months, also said that the unwinding of stimulus in the U.K. may be “years in the future,” citing investor expectations for interest-rate increases. The BOE’s Monetary Policy Committee is currently examining how it can guide those expectations and is scheduled to release a report next month.
The BOE’s exit will start with an increase in the benchmark rate and the market reaction to that will determine when sales of gilts purchased as part of the QE program begin, Fisher said at a hearing of the Treasury Committee. He said the BOE will lay out a timetable for sales as part of its QE unwinding to provide “certainty” to investors.
“We would only start when we thought we could maintain a program of sales for a good long period,” Fisher said. “We’ve suggested maybe six months’ worth at a time.”
Asked about the increase in bond yields after Federal Reserve Chairman Ben S. Bernanke signaled on June 19 the U.S. central bank may start tapering its monthly stimulus program this year, Fisher said “most of my contacts are saying this is a sensible correction to put some two-way risk back.” He added that the market was “ripe for volatility” prior to Bernanke’s remarks.
The BOE reacted to the market activity at its July 4 policy meeting, saying the “implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
“Volatility has not been particularly high over the last couple of months,” Fisher said. “It’s come up from what was a very low, compressed level to something which across markets, across those couple of months, has been about average, so we could easily see more volatile periods like this in the period to come.”
“I wouldn’t say I’m sure the current level is in the right place,” he said. “I think it will take a while.”
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