As with the financial crisis of 2008-2009, central banks have been at the forefront of responding to the Covid-19 crisis. The Federal Reserve was the first to act, cutting the interest rate by half a point at a special meeting of the Monetary Policy Committee.
A few days later, it was the turn of the Bank of England and the ECB. After these initial measures, new announcements were made urging banks to use all the tools at their disposal to ease the monetary policy stance, avoid a liquidity crisis and prevent the financing of households and businesses from drying up.
The purpose of these measures was not to stimulate demand but to prevent the shock from escalating financially. The policy of purchasing government bonds was also necessary to support the budgetary measures implemented by governments. The central bank has a great influence on the economy.
Base rates have been lowered to reach key levels: fixed at 0% to 0.25% in the United States, 0.1% in the UK and 0% in the Eurozone, the level has not changed since March 2016.
In the United States, among the ten measures taken, the Federal Reserve has proposed a number of programs. It thus reactivated some of what was proposed in 2008 to support capital markets and financial institutions’ access to liquidity.
The ECB and the Bank of England also encourage corporate lending through TLTROs (Targeted long-term refinancing operations) and TFSME (term financing scheme with additional incentives for SMEs), respectively. These two mechanisms make it possible to refinance banks on favorable terms and according to their loans to non-financial institutions.
Also, given the role of the dollar in international financial transactions, clearing lines between major central banks were renewed to maintain liquidity in the international interbank market. Finally, it announced 7 long-term liquidity delivery operations with maturities ranging from 16 months to 8 months, the first of which took place in May.
Central banks also announced the resumption or extension of asset purchase programs. 700 billion US Treasury bills and mortgage securities were purchased. In addition, the Federal Reserve is now adding to the purchase of bonds issued by private companies such as the ECB, the Bank of Japan, or the Bank of England’s existing programs.
The purchase ceiling, including government securities, was increased by £300 billion. Thanks to this, his securities portfolio eventually grew to £645 billion. An important aspect of the purchases made by the ECB relates to their distribution by asset class and in particular geographical origin.
According to the distribution key determined by the ECB, the holding of government securities issued by each country should be proportional to its share in the capital.
However, the ECB Chairman stated that a certain degree of flexibility will be allowed to limit the transition tensions that may arise in certain country debt markets.
In the absence of a European budget, crisis response is necessarily the responsibility of Member States. However, their ability to provide stability may be restricted in case of a re-emergence of country risk, which may lead to a drying up of liquidity in the markets.
The different Member States are not really equal before the markets due to their macroeconomic situation or debt levels like Italy.
It is therefore necessary to maintain a more or less homogeneous transmission of monetary policy. At the same time, the ECB’s role is predicated on ensuring that the multiplier effect of budget policy measures is not diminished. The effect of the interventions on the rates of the member countries and the desire to prevent a sharp increase in spreads are essential in this respect.
Because of the degree of independence, but above all because of the institutional architecture, this coordination can only be implicit and imperfect at the domain level.
In the United States, the policy of purchasing securities may accompany the action of the federal government, which can then organize interstate transfers. Then the Federal Reserve doesn’t need to intervene in government debt markets.
It should be noted that in the United Kingdom, coordination with the government and support of monetary policy to fiscal policy has been made more explicitly. This time the Bank of England bought independent securities directly from the primary market.
This coordination supports the corporate cash flow of the Bank of England and the Treasury by purchasing short-term issuance trade debt.
This is the reason why private-sector lending facilities were set up through the CCFF. In turn, the government legitimizes the action of the central bank as it guarantees that the damages resulting from the various measures will be covered by the Treasury.
The People’s Bank of China has also taken a series of measures to ease credit conditions and inject liquidity into the banking system. Special measures are also aimed at supporting lending activities for medical equipment manufacturers, small and medium-sized enterprises, and companies in the agricultural sector.
Interest rates were lowered, as in repo transactions (repo agreements) and medium-term loans. Finally, the reserve requirement ratio is also a monetary policy tool for the Chinese central bank. Thus, targeted discounts were applied to banks’ loan activities, especially for small and medium-sized enterprises.
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