World's central banks face slog to sway markets

Sun Sep 1, 2013 3:10pm EDT
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By Andy Bruce

LONDON (Reuters) - Central bank bosses in Europe and the United States have had a tough time trying to budge market expectations for monetary policy back into line with their own plans, as this week will again show.

Forward guidance - making plans for monetary policy in the months and years ahead explicit - was adopted in July by the European Central Bank and the Bank of England in August, following the U.S. Federal Reserve's example.

But it has already caused a problem of communication for policymakers, just as major Western economies are showing more signs of life.

As in the past, they must acknowledge the improvement to foster growing confidence among the public and investors.

But the addition of forward guidance has coincided with - and some economists say helped cause - an unwanted increase in market expectations that point to interest rises before central banks currently intend.

So while talking up the economy to the public, policymakers have at the same time been reminding markets the recovery is still too fragile to warrant these rate hike expectations.

That delicate balancing act falls to European Central Bank President Mario Draghi at this Thursday's policy meeting.

Last week, his British counterpart Mark Carney tackled it by warning the Bank of England could provide more stimulus for the economy if markets get ahead of themselves and threaten to choke off its recovery.   Continued...

A woman with walking sticks is silhouetted against the sky as she descends steps from a bridge next to the construction site for the new headquarters of the European Central Bank (ECB) in Frankfurt, August 28, 2013. REUTERS/Kai Pfaffenbach