(Repeats, without changes, story first published on Friday)
By Patrick Graham
LONDON, June 13 In the struggle to explain this
year's collapse in volatility and volume in financial trading,
one newly-nominated culprit is central banks' intent to use
every tactic available short of raising interest rates too soon.
It sounded like a deeply contrarian view on Friday after
comments by Bank of England Governor Mark Carney, but a study by
analysts from market heavyweights HSBC this week argued that the
use of macroprudential steps will make central bank interest
rates in general less volatile in future. Implicitly that may
mean markets see less marked swings.
The global economy is right at the point, as the economic
fates of Japan, Europe and the United States diverge, when an
upturn in trading action could be expected due to the growing
chances for arbitrage between future interest rates.
Yet volatility, which traders depend upon for profits, is at
rock bottom. Trading in currencies on the biggest platforms has
fallen by a third to half in the past year; options contracts
betting on volatility are around all-time lows.
Even with a blip higher stemming from Carney's comments on
Friday, sterling implied volatility was glued to its lowest
levels on record, less than a quarter of highs reached in 2008.
There are numerous theories as to why, ranging from the
growth in machine-driven trading to the scaling back of banks'
mandates to invest on their own account, disappointment at the
pace of the U.S. recovery or allegations of market manipulation
that have pushed traders back inside their shells.
The HSBC study argues that one big factor may be that
central banks are in the midst of a regime change of their own.
"Macroprudential policy, which aims to maintain financial
stability through targeted measures, is already part of the mix
and is set to grow ever more important," HSBC analysts said in
the paper this week.
"It will, in part, replace interest rate moves and since FX
has traditionally been very sensitive to rates, the
repercussions for the currency markets will be significant."
Thereafter, it all gets a bit cloudy.
New Zealand, Canada and Norway have all used targeted
measures to tighten their grip on mortgage lending and take some
of the heat out of their property markets but in the end wound
up raising borrowing costs anyway.
Indeed the New Zealand central bank delivered another
market shock this week in pledging it still has a lot more to
Likewise, while UK finance minister George Osborne promised
further steps to target house prices in a speech on Thursday,
Carney followed less than an hour later with a U-turn on policy
that looked very like a promise of higher borrowing costs this
This all goes to the traditional thinking of many market
players on macroprudential policy: it is very nice in theory but
has never worked except as a distraction before we return to the
real business of managing demand through interest rates.
Yet it is not just HSBC who says that view is outdated.
"What you have to recognise about macroprudential measures
is that they are a response to the failure of
inflation-targeting, which does not work and is too blunt an
instrument," said Neil Mellor, a currency market strategist with
U.S custodial lender Bank of New York-Mellon in London.
"You can certainly point to the failure of measures in the
past, but if for example we can even partially enhance economic
stability over the course of the cycle then that will be a good
thing. I think we will see a lot of tinkering over the next few
As with so much of policymaking since the 2008 crisis, this
all stems substantially from the need to find ways to do more to
address the imbalances and risks in the detail of economies that
interest rates can just wash over.
Much of the HSBC study concerns itself with trying to
establish the likely impact of the longer-term and more
consistent use of macroprudential measures.
But, as ever, there are imperatives for officials like
Carney in what is right in front of his nose: keeping the
British economy going as fast as he can without the wheels
coming off either the banking system or inflation.
Notwithstanding Thursday's words, if he can find any way to
accomplish that without having to deliver on the threat of
higher rates then surely he will.
"As a central banker you have to look at the overall picture
of the economy," says Andrew Wilson, CEO of Goldman Sachs Asset
Management in London.
"I am not sure it will reduce volatility but if
macroprudential policy dampens, for example, house price
inflation then it may mean monetary policy needs to do less to
weaken demand in the economy in general."
(Editing by Ruth Pitchford)