LONDON (Reuters Breakingviews) - There’s an end to everything except, apparently, central bankers’ creativity. Virus-damaged economies will need lots of help to heal, and more downturns are inevitable in the future. The monetary-policy bigwigs will keep coming up with more new ways to stimulate growth.
Necessity may persuade Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey to eventually overcome their aversion to negative interest rates, which have been part of the European Central Bank’s toolkit for some time. And central bankers could copy Bank of Japan chief Haruhiko Kuroda’s yield-curve control policy of targeting specific levels for 10-year government bond yields.
They also have the option to ramp up asset buying on a massive scale. The BOJ is the trailblazer: Its balance sheet is worth more than Japan’s annual GDP yet Kuroda on Monday pledged to buy unlimited amounts of debt. If central banks own too much of one asset, they can buy others. Powell has branched out into corporate debt, and is even purchasing junk bond exchange-traded funds. Buying equity ETFs, as Kuroda already does, is the next step.
The last taboo will be directly financing governments. The ECB can buy corporate bonds when they are first issued as well as in the secondary market. But major central banks have so far eschewed buying government debt in the primary market to protect their independence and credibility.
That said, the more they do across all markets, the more the lines blur. For example, there was obvious coordination when the BoE unexpectedly cut rates on March 11, just hours before finance minister Rishi Sunak unveiled fiscal stimulus. And major central banks have embarked on huge asset purchases that will keep yields in check at a time when politicians are spending vast amounts to prop up economies. Even a full-on depression may not be enough to provoke the crossing of this final red line, but central bankers have lately shown a willingness to push boundaries.
Two things could force a retreat. Any sudden surge in price pressures would make rate-setters, particularly those with a single inflation-fighting mandate, rethink their largesse. That’s not a problem now, but might be in the future. A second trigger could be overt political meddling that jeopardises central bankers’ credibility. Investor’ faith is hard to regain once it is lost. Asking Powell and his peers to do too much might finally make them resist.
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