March 4, 2009
The European Central Bank and Bank of England rate decisions are tomorrow. Both central banks are expected to cut interest rates by 50bp. For the BoE, the question is will they officially unveil a Quantitative Easing program and for the ECB, will they hint of one? Since Quantitative Easing will be the big story for the next 24 hours, it may be useful to review, What is Quantitative Easing.
Here is a great piece from Reuters:
March 4 (Reuters) – Central banks throughout the world are
considering or turning to non-conventional measures like
quantitative easing to keep credit flowing as they run out of
scope to lower benchmark interest rates any further.
But what is quantitative easing? Here are some details:
WHAT IS QUANTITATIVE EASING?
— Quantitative easing, notably employed by Japan from 2001
until 2006, refers to ways of boosting economic growth after
traditional monetary policy tools, such as interest rate
targets, have been exhausted.
— Central banks flood the banking system with masses of
money, more than is needed to keep official interest rates at
zero or a low rate, to shore up financial systems and promote
lending. They usually do this by buying up large quantities of
assets from banks.
MAJOR CENTRAL BANKS AND QUANTITATIVE EASING:
* U.S. FEDERAL RESERVE:
— Economists agree the Fed’s various programmes to boost
the flow of credit through the expansion of its balance sheet to
over $2 trillion can be regarded as a form of quantitative
— On March 3, the Fed announced the details of the Term
Asset-backed Securities Loan Facility, TALF. A $200 billion
programme to lend against securities backed by student, auto,
credit card and business loans, TALF could expand to $1 trillion
and include troublesome mortgage and debt securities from banks.
— The Fed is buying highly rated, U.S.-dollar denominated,
three-month commercial paper through a special purpose vehicle
to run until Oct. 30.
— In January, the Fed started a programme to buy $100
billion in the direct obligations of housing-related government
sponsored enterprises — Fannie Mae, Freddie Mac and the Federal
Home Loan banks — and $500 billion in mortgage-based securities
backed by Fannie Mae, Freddie Mac and Ginnie Mae.
* EUROPEAN CENTRAL BANK
— ECB policymakers have said they considering all options
to extend its monetary toolbox further, although they stress
that no decisions have been taken.
— Economists polled by Reuters give a 40 percent chance to
the ECB embarking on quantitative easing in the coming months.
* BANK OF JAPAN
— Bank of Japan policymakers have not ruled out a return to
quantitative easing, although they have said it is unlikely or
at least not needed for now.
— While not constituting quantitative easing, the Bank of
Japan is to buy up to 1 trillion yen ($10 billion) of corporate
bonds maturing within a year. [ID:nT220574]
– It is also buying up to 1 trillion yen worth of shares
held by Japanese banks. BOJ plans to sell the shares from Apr
2012 to Sept 2017.
* BANK OF ENGLAND
— The BoE has asked for permission from the British
government to formally embark on full quantitative easing that
would involve the purchase of gilts and other commercial assets
using new money.
— Finance minister Alistair Darling is expected to give the
BoE the go-ahead to purchase between 40-150 billion pounds
($56-211 billion) with which to purchase assets on Thursday.
— The central bank already buys commercial paper under its
Asset Purchase Facility. However, the scheme does not constitute
quantitative easing as it is financed by the issuance of
* OTHER CENTRAL BANKS
The Bank of Canada said on March 3 it would engage in
quantitative easing if required after it cut its benchmark
interest rate to a record low of 0.5 percent.
The Swiss National Bank has said it is studying
unconventional measures such as foreign exchange interventions
and quantitative easing to improve economic conditions.
The Bank of Israel said on Feb 16 it would start buying
government bonds on the secondary market to improve liquidity.