Surprise us or Guide us ...... even the central banks can't decide

Wednesday 29th April 2015

 Surprise us or Guide us ...... even the central banks can't decide

 "Central banks hone their weapon of surprise" , The Financial Times, p.32

There was a time, in the dim but not very distant past, when the generally accepted modus operandi amongst central banks was to make clear their monetary policy  --  and, even more to the point, stick to it. The transparency of such practice was viewed as desirable and encouraged stable market conditions.

A whole host of surprise decisions by central banks across the globe over the last year would seem to prove that the thinking has changed pretty comprehensively. The policy of "forward guidance" 

has been rejected. Particularly with interest rates so low, the room for central banks to manoeuvre  

is severely curtailed, removing a hugely important tool in influencing events. Surprise announcements have a much greater effect and return some measure of power to the central banks.

Besides, many would argue that the volatility engendered by surprise moves merely reflects a healthy two-way market.

Perhaps, but the "taper tantrum" of 2013 after then Fed chairman Ben Bernanke even suggested a slowing of the QE programme would argue against that. B of A Merrill Lynch's Ethan Harris says the way forward may now lie somewhere in the middle of full guidance and staying schtum. It's hard to know exactly what he means by that or how it would be put into practice, with markets being as flighty as they are and prone to reacting (overreacting?)  to the merest nuance.