June 23, 2013 / 2:01 PM / 6 years ago

BIS tells central banks not to fear markets when withdrawing crisis cash

* Exit more challenging the longer expansive policy stays

* Size and scope of exit will be unprecedented

* Central banks need to factor in global policy spillovers

By Eva Kuehnen

FRANKFURT, June 23 (Reuters) - Central banks should not allow fears of disrupting markets to delay the timely withdrawal of cheap money they pumped out to calm crises, the Bank for International Settlements said on Sunday.

The U.S. Federal Reserve has become the first of the world’s major central banks to lay out a plan for pulling back extra funding, triggering a global selloff when it said it would begin winding down its bond purchases later this year.

In its annual report, the BIS anticipated that signalling an exit may cause market disruptions and warned that the risk from delaying to avoid such disruptions was likely to rise over time.

“(Central banks) will need to strike the right balance between the risks of exiting prematurely and the risks associated with delaying exit further,” the BIS report said.

“The longer the current accommodative conditions persist, the bigger the exit challenges become,” it said.

Policymakers also need to take more account of how national monetary policy may affect other economies, the BIS said.

“This does not necessarily mean that central banks need to coordinate their policies more closely than in the past. Rather, it suggests that central banks, at a minimum, may benefit from putting more weight on the global side effects and feedbacks that arise from their individual monetary policy decisions.”

Central banks have brought interest rates close to zero and expanded their balance sheets to “staggering levels” to cushion the blows from years of financial and economic crisis.

“Tools to manage the exit are in place and have been tested to some extent. But central banks are mindful of the fact that the size and scope of the exit will be unprecedented,” it said.

“This magnifies the uncertainties involved and the risk that it will not be smooth,” it said.

The BIS said central banks needed to weigh their options and that large-scale asset purchases did not necessarily need to be unwound before raising rates.

“Central bank deposit facilities, payment of interest on excess reserves, term repos and other arrangements now offer central banks a wide range of options that allow them to decouple policy rates from balance sheet policy decisions,” it said.

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