Prepare for fireworks as policy uncertainty returns

Prepare for fireworks as policy uncertainty returns

Willem Verhagen, senior economist at ING Investment Management, explains why the return of monetary policy uncertainty could take some investors by surprise.

In a very uncertain world, the certainty provided by central banks’ ‘lower for longer guidance’ has been a welcome anchor for financial markets. The main benefit of gradually increasing the commitment content of forward guidance was it gave policymakers more leverage over longer-term rates. To some extent, this compensated for the loss of policy traction stemming from the fact actual policy rates hit the zero lower bound. Nevertheless, there are potential costs attached to stronger guidance as well. For instance, it increases the risk the central bank will have to deviate from the ann...