MNI: BOE Kohn Warns Of Fresh Stability Risks As Rates Rise

By David Robinson

     LONDON (MNI) - Donald Kohn, a member of the Bank of England Financial

Policy Committee, warned Tuesday that central banks finally starting to tighten

policy will throw up fresh financial stability risks.

     In a speech at a Bank for International Settlements Conference, Kohn said

that gradual and predictable setting of monetary policy would support financial

stability. Hiking interest rates and unwinding quantitative easing, however,

would create its own stability risks.

     "Monetary policy can contribute to financial stability by acting as

gradually and as predictably as allowed by the evolving economic circumstances,"

Kohn said.

     "Macro and micro-prudential policies need to be alert to and anticipate

financial stability risks that might arise as rates rise and central bank

portfolios stabilize and then decline," Kohn added.

     He highlighted the importance of stress testing banks in the current policy

tightening environment and of the potential risks posed by distortions in yield

curves as market participants react to tightening.

     "The curve itself may even twist in unexpected ways, revealing

vulnerabilities in asset prices and portfolio choices," Kohn said.

     In his speech, Kohn set out how the Bank of England had managed to

co-ordinate monetary and financial stability policies throughout the easing

cycle, and now the authorities faced a fresh challenge with the arrival of the

tightening cycle.

     The Monetary Policy Committee is now widely expected to hike Bank Rate in

November, with asset purchases declining as a share of outstanding debt stock as

quantitative easing is held steady and debt issuance continues to rise.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]