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Bankers say end of loose monetary policy era has fuelled volatility

Reserve Bank of India's Governor Raghuram Rajan attends the "Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?" event during the 2015 IMF/World Bank Annual Meetings in Lima, Peru, October 8, 2015. REUTERS/Paco Chuquiure/Files

DAVOS, Switzerland (Reuters) - The end of ultra-loose monetary policy and the divergence between central banks in the United States and Europe are contributing to recent volatility in financial markets, top bankers at the World Economic Forum in Davos said.

Raghuram Rajan, the governor of India's central bank, acknowledged that we may now be experiencing the darker side of the massive monetary stimulus of past years.

"With many central banks with their foots firmly pressed on the accelerator, the variety of new aggressive monetary policies, it's not clear that we've really benefited tremendously," Rajan said.

"To some extent we may have reduced the room for other policies or reduced the incentives for other policies. We're not quite sure what the fundamental value of any asset is.

"And I would suspect that this is probably what is going on today, that as there is some anticipation that central banks will start reducing the accommodation, asset prices are trying to find the appropriate level."

Axel Weber, chairman of Swiss bank UBS and former head of the German Bundesbank, pointed to the divergence between the U.S. Federal Reserve, which is in tightening mode, and the European Central Bank (ECB), which is expected to remain accommodative, as a source of volatility. But he said this would not last long.

"The issue is the current policy divergence which I think is driving some of this international volatility. My view is this cannot last for long because we've never seen a decoupling," Weber said, speaking on a panel with Rajan.

"If the U.S. were to stay course the dollar would continue to rise and I think that would recouple the economies. So at some point you're going to see the impact of current policies starting to mitigate."

Weber also touched on the refugee crisis in Europe, saying it was likely to "focus politicians' minds", on the one hand accelerating the drive towards closer integration among euro zone members and making Europe "more optional" for countries that don't share the single currency.

"Unless we have this bifurcation of interests in Europe I think Europe will continue to face challenges," he said.

(Reporting by Noah Barkin; Editing by Mark Heinrich)