across the atlantic, the federal reserve, has advanced in normalisation with four rate rises in 18 months, which have brought the target rate on the federal funds to 1. 25 per cent, from a target of 0 - 0. 25 per cent in the seven - year period to december 2015, and an announcement to cautiously start the normalisation of its balance sheet already in october this year.. despite the – somewhat reluctant – tightening of the fed, the us monetary policy could actually be assessed as still being rather loose. the global capital flows from the emerging markets that are invested in the us contribute to this easing. turning now to the bank of england, in the aftermath of the brexit referendum ( summer 2016 ), the bank cut its interest rate to a record low of 0. 25 % after more than 7 years of static interest rates. it also boosted its qe scheme, while committing extra funds to encourage banks to lend. the rhetoric however has become more aggressive over the past few months, notably due to 4 / 9 bis central bankers'speeches surging inflation – brought on by the weakened pound since the referendum – despite a slowdown in the economy as the country prepares to leave the european union. with respect to normalisation strategy, the bank of england has in the past given indications that rate rises would precede any asset sales. according to governor carney back in 2013, the first move would be to tighten conventional monetary policy, for some time, or to some degree, before considering adjustments to the size of the balance sheet. overall, in the context of the ongoing global economic recovery, the major central banks can adjust the parameters of their policy stance at a rather small cost in terms of market disruption / dislocation. as markets anticipate the first tightening steps from the major central banks, a channel that is likely to show some volatility is the exchange rate channel. this adds to uncertainty, as – among other things - it has implications for the medium - term outlook for price stability. in addition, a possible overshooting in the foreign exchange market could lead to fluctuations in the trade imbalances, including those of the euro area. the outcome of the normalisation process is likely to be determined by the interplay and the relative stance of the policies of major central banks as they move towards a less accommodative stance in the coming years, as well as by several structural features of the different economies. in any case, appropriate communication is vital

central bankers'speeches i. 3 alternative paths to normalization and potential impact overall, the policies aiming to contain deflationary pressures have been effective in stabilising the financial system and thereby preventing a deep economic downturn. some ten years later, the world economy has entered a synchronised growth phase. all three of the world ’ s economic powerhouses – north america, europe and china – are growing in unison. with the global recovery firming up and global inflation rising, some major central banks might now be looking to gradually reverse course. the key challenge for monetary policy is how to unwind this accommodation in the least disruptive manner in terms of inflation, output and financial market stability. in terms of the broader alternative strategies to normalisation, the following paths could be envisaged : first seeking to guide policy rates higher, before initiating downward balance sheet adjustments ( as in the united states ) ; starting to downsize the balance sheet before initiating a tightening of interest rates ; undertaking both in tandem. the sequence in the implementation of balance sheet and interest rate measures, as well as the relative weights, could have a differing impact on the domestic economies, as well as crossborder spillovers, including through exchange rates and other financial channels. looking at specific central banks, the continued discrepancy between strengthening economic activity and subdued inflation dynamics poses a puzzle for the monetary policy of the ecb. in the absence of sufficient evidence of progress towards a durable and self - sustaining convergence in the path of inflation, a scaling - back of the exceptional degree of monetary policy accommodation is not warranted. deliberations on the future course of the ecb monetary policy are ongoing, especially regarding considerations about its asset purchase strategy beyond december 2017. adjustments in the monetary policy stance should be prudent and gradual, so as to ensure that any withdrawal of stimulus does not undermine the recovery amid the lingering uncertainties. in this vein, clear and timely communication of the governing council ’ s assessment is of utmost importance. given that markets can be sensitive to incoming information, timely communication is key to avoiding an extreme reaction, or “ taper tantrum ", as experienced following the first announcements by the fed that it would taper its qe purchases back in 2013. the recent experience warrants caution. even hints at policy normalisation may cause an unwarranted tightening in financial conditions, as evidenced by the market movements after the speech of president draghi in sintra on 27 june 2017.