Central banks suppressed volatility through policies: Rajan

In October Bank of Japan announced a stimulus boost to stimulate ailing economy while ECB is set to introduce monetary stimulus next week

Reserve Bank of India (RBI) Governor Raghuram Rajan said central banks across the globe has suppressed volatility through their policies.

“Could we see enormous volatility in asset prices going forward? That is a concern, and it is a concern I have been expressing for some time. That is, central banks have suppressed volatility through these policies,” said Rajan, in an interview to The New York Times on Friday.

Rajan was referring to the sharp drop in global crude prices over a short span of time. “I was talking to some market participants, and they were extremely worried about the extent of volatility that can emerge in markets in a very short run, one example being oil prices. I mean, this is a very deep market. And overnight, virtually overnight, maybe in a span of a month or two, it has gone from $100 a barrel to $50,” he said.

In October, Bank of Japan announced a stimulus to boost the ailing economy, while European Central Bank has is set to introduce monetary stimulus next week. Till October 2014, even US Fed was pumping liquidity through its bond-buying programme.

“Effectively, every time prices move considerably, some central bank or the other says, ‘Wait a minute, wait a minute, I’m going to give you some fresh liquidity,’ and we essentially offer a put option to the markets. So it’s not a Bernanke put or the Greenspan put. Now, it’s the universal central bank put. Have we, in an attempt to banish volatility — which wasn’t, I think a direct objective of any central bank, but indirectly, we’ve come to that — created the danger of much more volatility,” said Rajan.