LONDON/WASHINGTON (Reuters) – Central banks are pulling out all the stops to try to shield their economies from the new coronavirus pandemic, raising questions about whether they risk crossing a line by bailing out governments that are massively raising their spending.
Below is a summary of what leading central banks are doing and the possible dangers of such huge emergency measures to support their economies through the new coronavirus crisis.
THE UNITED STATES
The U.S. Federal Reserve, having cut interest rates back to their global financial crisis low, is amassing more bonds again. Its debt stockpile has already leapt to $6 trillion, or 25% of U.S. economic output, and more buying is on the way.
The European Central Bank and the Bank of England have revived their bond-buying programmes, which are at record high levels, after running out of room to cut rates further.
The ECB’s benchmark rate sits below zero while the BoE last month cut its rate to an all-time low of 0.1%.
The Fed, the ECB and the BoE have also pumped liquidity into their banking systems, which have clamoured for dollars, and are working on ways to get credit to companies threatened with collapse during the coronavirus shutdowns.
The Bank of Japan has pledged to buy unlimited amounts of government bonds to cap borrowing costs at zero. The central bank now owns nearly half of Japan’s government bond market and has sharply increased the pace of its buying since mid-March.
WHAT IS HELICOPTER MONEY?
U.S. economist Milton Friedman used the term to talk about dumping money unexpectedly onto a struggling economy as a way to shock it out of a deep slump. In a helicopter money drop, a central bank would directly increase the money supply and, via the government, distribute the new cash to the population with the aim of boosting demand and inflation. It’s different from the ongoing bond-buying by central banks in which bank-owned assets are swapped for new central bank reserves. It is also different from a central bank directly financing government debt.
IS JAPAN RESORTING TO HELICOPTER MONEY?
Some analysts say Japan’s yield curve control policy is like a form of helicopter money because it allows the government to spend more without having to worry about bond yields jumping.
Governor Haruhiko Kuroda rejects the term, saying the BOJ still buys bonds from the market and does not directly underwrite debt from the government, something that could undermine confidence among investors.
However, the line has appeared blurred because the BOJ buys roughly the same or bigger amount of bonds issued by the government.
LESSONS FROM HISTORY
When Bank of England Governor Andrew Bailey announced a 200 billion-pound increase to the BoE’s bond-buying programme on March 19, he said it was not money to fund directly the government, which a day later announced huge spending measures.
“I just want to emphasise that we are not abandoning the, I think, very clear central bank philosophy in terms of monetary financing because history tells us where that leads,” he said.
BUT ARE CENTRAL BANKS RISKING HIGH INFLATION?
The idea of central banks helping governments spend more has raised concerns about a rise in inflation and even drawn parallels with the disastrous hyperinflation of 1930s Germany and 1990s Zimbabwe.
Central bankers dismiss such comparisons, saying those cases involved unstable governments printing notes and handing them out to the public.
But JP Morgan strategist Jan Loeys said that if central banks eventually shift from their existing bond-buying programmes to direct funding of government spending, then inflation – which is currently low – might reawaken.
Ex-BoE deputy governor Charlie Bean said central banks had to show that their amassing of government bonds was temporary. “If that is done, I see no reason why the financial markets need worry unduly about any inflationary consequences,” he said.
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