In the season finale of the Flavour of Love, iconic personality and fan-favourite (she was robbed) Tiffany ‘New York’ Pollard describes her competition and soon-to-be winner, Hoopz, in one phrase. “She nervouses (sic) me!” Though Tiffany was talking about how she thought Hoopz was a psychopath, it is clear from America to Indonesia that the same mindset dominates central bankers as they combat the impact of Covid-19.
On the pandemic’s current path, it is set to steal the Global Financial Crisis’ crown as the defining economic crisis of the modern era. It is easy to see why with US weekly unemployment claims rising by over 1000% in the week to the 23rd of March and mortgage forbearance jumping by 2000% in a month. Back home, lines outside Centrelink resemble footage from the great depression. Truth be told, the global economy, which was wobbly to begin with, has seen the biggest hit since the Second World War as countries grapple with the trade-off between keeping the economy running and preventing the uncontrolled spread of Covid-19. In response, fiscal authorities have done what they do best (credit fuelled spending binges) but it is monetary policy that is going, well, unconventional.
But how can monetary policy go ‘unconventional’? In technical terms, unconventional monetary policy refers to actions taken by central banks when traditional channels of monetary policy are impaired by market stress. It is what the central bank does when they feel altering short-term interest rates won’t do anything. It became ‘popular’ following the GFC of 2008 and the European Sovereign Debt Crisis of 2010, though Japan has dabbled since the 90s. Central bankers lowered rates to zero (the lower bound by economic convention) but even this was not enough to stabilise the economy so unconventional policy was introduced.
The two most notable policies are quantitative easing (QE) and negative interest rates. Negative interest rates are self-explanatory, essentially the central bank charges a negative interest rate on deposits held there, meaning commercial banks pay the central bank to hold onto their excess reserves. The European Central Bank (ECB) has maintained a negative deposit rate since 2014 and the Bank of Japan (BOJ) since 2016. QE was first used by the BOJ in 1997 though it was not yet called that and has become the go to backup option of beleaguered central banks everywhere. In effect, QE is the large-scale (the quantitative) purchase of long-term government bonds among other securities to ease long term interest rates (the easing). Importantly, bonds are not purchased directly from issuers (I’m getting to that), but rather on the secondary market. The list of central banks that pursued this policy is markedly longer than negative interest rates with the BOJ, ECB, Federal Reserve and the Bank of England all engaging in it at some point in the last decade. With the Covid-19 crisis causing bringing economies to the brink, suddenly unconventional policies are back in fashion.
Fans of the RBA’s website – such as yours truly – might have noticed a new addition to their reported key statistics. Joining inflation, the cash-rate target and exchange rate is the ‘3-year AGS target.’ That is, the target yield on three-year Australian Government Securities. The RBA is reporting this all of a sudden because as of March 20th, it began its first ever QE program. Monetary authorities around the world are moving beyond cash rate targets as they work to save their respective economies. On March 16th the Federal Reserve slashed rates by 1% and announced $US500 billion in government security purchases and a further $US200 billion of mortgage-backed securities. The ECB reintroduced its Targeted Long-Term Refinancing Operation, essentially a loan subsidy scheme, and as well as further asset-purchasing schemes. In a quick aside, it is interesting to note that the ECB left its headline interest rate unchanged, indicating that perhaps going lower is no longer a possibility. The Bank Indonesia, the central bank, cut out the middle-man and started buying bonds directly from the government.
This article, much like an internship rejection email, is only a brief overview of what is a vast and complicated topic. As the economic situation worsens, the monetary policy will have to become more unconventional to match. The ultimate goal of course, is reminiscent of what Tiffany Pollard said before Pumkin spat on her – “I look better than you making you exit right now!” Central banks hope that the same can be said by the economy to covid-19.