Central Bankers Want Communication, Not Coordination

There is no behind-the-scenes pact between powerful central bankers to tighten policy but the potent effect their actions have on financial markets means they want a deeper understanding of each others’ motivations, officials told Reuters.

European Central Bank President Mario Draghi renewed his long-standing wish last week for more talks between global central banks, fuelling suspicions that policymakers discussed more at recent gatherings than they admit.

Indeed, the ECB, the Bank of England, the Bank of Canada and Norway’s central bank all turned unexpectedly hawkish in just a matter of days with Sweden and the Reserve Bank of Australia expected to follow suit this week.

Coming on the heels of the Bank for International Settlement’s annual meeting in Switzerland, where top officials are well shielded from the media, traders and analysts have looked suspiciously at the turn of events.

However, policymakers on both sides of the Atlantic said they often share their economic views in private but to foster understanding and not to coordinate policy as each central bank acts independently.

Banks need to fulfill different mandates with widely different tools and any hint that domestic policy is subjugated to the interest of foreign central banks risks a public relations disaster. This makes policy coordination, let alone cooperation, practically impossible, sources said.

While central banks make their own decisions, these still have far reaching consequences for currency, bond and derivatives prices. Therefore policy transparency, the key benefit of private meetings, prepares policymakers for what may be coming, limiting market volatility.

“The more we can talk to each other and also communicate to markets in a way that doesn’t increase uncertainty, that would be very helpful,” Draghi said last week in Sintra, Portugal, at another gathering of central bankers. “So the need is there, how to do it is not simple.”

Some market players seized on that as a new openness by Draghi to coordinate policy with other central banks. Indeed, such cooperation is not unknown.