BOE FPC member Donald Kohn with a timely reminder on rate hike risk 19 Sept
Regulator Kohn is speaking at a conference at the BIS in Switzerland with a speech entitled "Cooperation and coordination across policy domains"
- Monetary, macroprudential and microprudential policies share a common underlying objective-to enhance public welfare by fostering sustained economic expansion at the economy's potential, damping financial and economic cycles. But they contribute to overall stability by focusing on different risks to sustained expansion, and use different tools to meet their objectives.
- When low short-term interest rates are accompanied by upward sloping yield curves, intermediaries are incented to borrow short and lend long. This leaves them vulnerable to runs if high leverage raises questions about their ability to repay. And in low rate environments savers and intermediaries trying to meet unrealistic nominal interest rate targets may settle for inadequate compensation for extra risk they are taking. This will compress risk spreads and raise asset prices beyond sustainable levels justified by fundamentals.
- Macro and microprudential policies need to be alert to and anticipate financial stability risks that might arise as rates rise and central bank portfolios stabilize and then decline. Stress tests of banks will be an essential tool for spotting risks and building resilience. Particularly as interest rates rise along the yield curve. The curve itself may even twist in unexpected ways, revealing vulnerabilities in asset prices and portfolio choices. But a resilient financial system will enable monetary policy to continue to unwind the unconventional policies previously put in place.
Full speech here for those having trouble sleeping.
