In the attempt to explain this year’s fall in volatility and volume in financial trading, one newly-nominated culprit central bank’s plan to use every available strategic short of raising interest rates were revealed too soon.

It appears to be a deeply contrary view on last week’s comment’s by the Bank of England’s Governor Mark Carney, yet a study by analysts from market mogul HSBC this week disputed that the use of macro-prudential approaches will make central bank interest rates in general less volatile in the future. It basically implies that markets will see less marked swings.

The global economy is correct at a certain the point, as the economic fates of Japan, Europe and the U.S. converge, when an upturn in trading action would be expected due to the growing chances for arbitrage between future interest rates in general.

Although volatility, which traders are very dependent upon for profits recently hit rock bottom, the trade in currencies on the largest platforms has fallen by almost a half in the previous year with options contracts betting on volatility are within all-time lows.

Even with a malfunction which stemmed from the Governor’s comments last week, sterling implied volatility was glued to its lowest levels on record which was less than a quarter of highs it reached six years ago.

There are several theories as to the reason why the growth in machine-driven trading to the scaling back of bank’s authorisation to invest on their own account included; discontentment at the rate of the U.S. recovery and the allegations of market rigging which pushed traders back inside their shells.

The HSBC research argues that one of the largest factors was attributed to that of central banks upon their change of regime. Because of the macro-prudential policy which aims to maintain financial strength through targeted measures it is already regarded as a part of the mix and is set to expand as ever more important.
It will eventually replace interest rate moves and since FX has traditionally been considered to be very sensitive to rate hikes, the resulting repercussions for the currency markets will be substantial.

Release under immense pressure

Norway, New Zealand and Canada have all used targeted measures to tighten their grip on mortgage lending by taking some of the pressure out of their property markets but in the end led to a rise in the borrowing cost.

Indeed the New Zealand central bank once again carried out another stock market this week in pledging that it still has more plans in improving its current position.
Also, the U.K. finance minister also assured to take additional steps to target house prices in a recent speech last week by promising to up the borrowing cost this year. This all goes to the conventional way of thought that many market players on macro-prudential policy that it may be good it terms of theory but it is not widely perceived as something feasible in actual practice.

What is needed to be recognise is that the measures that they are suppose to respond in the failure of inflation-targeted instruments are not very effective. There is indeed a point to the failure of measures in the past and that it can even partially enhance economic stability over the course of the cycle which is actually a good thing.

As with so much revamps in policy making since the 2008 crisis, this all resulted significantly from the dire need to find new ways to do more in order to address the inconsistencies and risks in the detail economies that interest rates can simply wash over.

Much of the HSBC research is heavily concerned in its attempts to establish the likely impact of the longer term and more consistent use of macro-prudential measures. However, as there are more imperatives for officials in what is considered right in keeping the British economy going as fast as it can without the momentum coming off either the banking system or inflation in general.

It is uncertain if the reduced volatility will result in a dampening in macro-prudential policy but it may most likely mean that monetary policy will need to do less in order to weaken demand in the economy in general.