UBS Chairman Weber: Central banks are keeping cautious faith in policy normalization

Monetary policy normalisation will be an issue in next cycle, says UBS...
Key Points
  • UBS chairman tells CNBC that central banks fear that continuing easy monetary policy will build up risks in markets.
  • Axel Weber noted that the Fed is normalizing its policy rate at around half the speed it had in previous years.
  • The former central banker said markets should remember that liquidity will not suddenly end.

The chairman of UBS told CNBC that central banks around the world will stick to the path of policy normalization in a bid to avoid the risk of volatility in markets.

Policy normalization is the attempt by central banks to reduce the size of their balance sheet and raise benchmark interest rates so that monetary policy returns to the environment prior to the global financial crisis in 2008.

Speaking to CNBC's Joumanna Bercetche in an exclusive interview at the UBS European Conference in London on Wednesday, Axel Weber said that global liquidity, while still increasing would soon start to shrink as central banks stopped buying assets.

"That's going to produce a headwind to global markets, but the central banks are confident enough they can manage the situation and that their monetary policy normalization is the right way to go," said Weber.

Weber said central banks fear that continued easy monetary policy will build up risks in markets as volatility grows, putting strain on any financial instabilities.

The U.S. Federal reserve has led the charge in raising interest rates, leading to some criticism that the world's most influential central bank could choke off economic growth. That concern has been reflected in equity markets. The Dow Jones Industrial Average lost 600 points on Monday, and as of Tuesday 65 percent of S&P 500 stocks were considered to be in correction territory.

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Weber noted that the U.S. Federal Reserve has actually been normalizing its policy rate at half the speed it did over previous cycles and being a buyer of last resort was not a function that any central bank had at the core of its remit.

He added that market participants should remember that market liquidity was unlikely to disappear quickly.

"What you will see is that as the Fed has reduced its balance sheet and as the ECB balance sheet has stabilized, they will still reinvest any maturing debt in the future, so it is not as if their balances will shrink."

The UBS chairman said he expected policy normalization would not arrive in a finished form until the next economic cycle.

"Clearly the central banks are in a cautious normalization," he said before adding that current evidence of a slowdown in some countries around the world would also give central bankers pause for thought.