“Volatility is back and some volatility is healthy” – these were some of the remarks made by Bank for International Settlements (BIS) economist Claudio Borio, commenting on the increased volatility in stock markets since February, which have ended a long period of unusual calm and highlighted how central banks face a difficult task in normalising accommodative monetary policies.

Speaking as the organisation published its quarterly review for Q1 2018, Borio, who is head of the BIS's Monetary and Economic Department, said: “There are few things more insidious in markets than the illusion of permanent calm. As experience indicates, that illusion can set the stage for some of the largest and most damaging losses.”

He noted that volatility had returned mainly to equities, with “just a few ripples in sovereign bonds and exchange rates”. The trigger for the volatility was a drop in the US stock market on 2 February, which erased the sizeable gains accumulated since the beginning of 2018, with more stock market jitters caused by trade tensions at the beginning of March. Borio commented: “The trigger for the drop appeared to be the release of a strong wage growth figure in the United States, taken as pointing to the risk of an unexpected increase in inflationary pressures. The yield on Treasuries rose, and equities started to dive.”

Borio said that the recent volatility had underscored how delicate a task central banks are facing. He added: “They need to strike a balance between normalising policy, not least to increase their room for manoeuvre to deal with the next downturn, on the one hand, and avoiding unnecessarily derailing the expansion, on the other. And they need to do so in a world that, post-crisis, has witnessed a further increase in overall debt in relation to incomes and output. The path is a narrow one. And it requires the active support of other policies. The most recent protectionist rhetoric complicates matters further. Treading the path will call for a great deal of skill, judgment and, yes, also a measure of good fortune. But policymakers need not fear volatility as such. Along the normalisation path, some volatility can be their friend.”

The BIS Quarterly Review, March 2018 also includes expert opinions on:

• digital, card and cash payments;
• trade and current account balances at global firms;
• early warning indicators of banking crises;
• banking in emerging Asia;
• lending by Asian property developers;
• passive investors in financial markets; and
• banks' price-to-book ratios.