This is an important week for financial markets on so many levels. Besides the U.S. elections that held the headlines (and the market’s volatility) for the last several months, three major central banks have issued or are preparing to issue their monetary policy decisions.
So far, the Reserve Bank of Australia eased the policy more on Tuesday. It increased the pace of the QE program and even delivered a fresh new cut to the cash rate. Tomorrow, the Bank of England and the Fed in the United States are next. At least when it comes to the Bank of England, the market expects another increase in the QE program, of about GBP150-200 billion. As for the Fed, it may be that we will do some more easing, only so far, the American central bank did not hint at anything.
ECB Going Full Japanese
The chart above shows the length the central banks went during the coronavirus pandemic. Consensus exists between central bankers that the QE programs are more effective in easing the monetary policy. That is, more effective than cutting the rates below zero.
The first reaction to the crisis for all central banks in the developed economies was to cut the rates to zero – or awfully close to it. Those that had the rate already into negative territory (e.g., ECB), engaged in QE and some other easing forms (e.g., explicit forward guidance).
One way or another, all these central banks embarked on QE. The process involves buying their own government bonds (i.e., debt) with the aim of lowering the yields. In doing so, the ECB comes closer to the Bank of Japan if we compare the percentages of central banks’ purchases of the marketable securities or debt issued by their governments during the pandemic.
The ECB outpaces even the Fed (71% vs. 57%) and threatens to take out the BOJ sooner rather than later. Last week, the ECB hinted that it would further ease monetary conditions in the Eurozone. However, the ECB already has the deposit facility rate into negative territory for several years now. Therefore, the most effective way to do so is to buy national banks’ bonds but also the new bonds issued by the European Commission (i.e., SURE bonds).
If that is going to be the case, the ECB threatens to become the central bank with the largest percentage of debt bought during the pandemic. However, considering that many European economies are in lockdown mode for the second time this year, the ECB may not have any other options.