Many traders, especially retail ones, often wonder what the role of a central bank is in fostering economic growth. Besides raising or cutting the interest rates in an economy, central banks are responsible for the overall monetary policy, and their actions often spark controversies.
During the COVID-19 pandemic, central banks went the extra mile and provided economies with excess liquidities to help ease the economic strains. Almost all central banks used unconventional monetary policies that were reluctant to use before – yet they find them handy during this health crisis.
The Indirect Effects of Central Banks’ Actions in Developed Countries
One of the most active central banks during the pandemic so far was the European Central Bank (ECB). Its recent TLTRO-III bold operation offered multi-year loans to negative rates to banks in the Euro area. More precisely, banks will have to pay back less than they took from the ECB – a welcome improvement in banks’ profitability and credit flow in the Euro area.
The ECB and the Federal Reserve in the United States (Fed) also started buying corporate bonds during this crisis. The idea is to ease the financial burden for corporations while providing liquidity for day-to-day business operations. As a result, debt issuance by European and American corporations increased significantly.
Bank of England (BOE) boosted its bond-buying program last week. The £100 billion increase of new purchases creates new digital money destined to ease further the challenges facing the United Kingdom’s credit market.
Quantitative Easing (QE), is largely viewed now as a regular policy tool in any central bank’s arsenal. Not long ago (i.e., during the 2008-2009 Great Financial Crisis), Ben Bernanke, the one that introduced the concept for the first time while at the helm of the Fed, took much criticism from economic experts regarding the side-effects of QE.
Nowadays, right when the COVID-19 pandemic started, QE was one of the first measures taken by the majority of central banks – ECB, Fed, BOE, Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ), to name a few.
The lesson here is that central banks’ activity increases in visibility during economic crises, while often unnoticed in regular economic times. No central bank likes the current conditions in the financial system – but the way they all came together to face the crisis tells much about the severity of it.