Summary: Information released by several central banks this week suggests that multiple economies may scale up re-stimulation measures or even adopt negative interest rates, as renewed COVID-19 outbreaks could intensify the economic impact. However, the re-easing policy options proposed by the European Central Bank (ECB), the Bank of Japan (BOJ) and the Bank of England (BoE) have triggered considerable divergence among policymakers at national and regional levels.
Information released by several central banks this week suggests that multiple economies may scale up re-stimulation measures or even adopt negative interest rates, as renewed COVID-19 outbreaks could intensify the economic impact. However, the re-easing policy options proposed by the European Central Bank (ECB), the Bank of Japan (BOJ) and the Bank of England (BoE) have triggered considerable divergence among policymakers at national and regional levels.
ECB weighs expanding bond purchases. ECB President Christine Lagarde said on October 28 that the bank stands ready to launch more stimulus measures to support the eurozone's struggling economy, as major economies including France and Spain experience another surge in COVID-19 infections.
Speaking at a hearing of the European Parliament that day, Lagarde warned that the region's economic recovery remains uncertain. She said that although economic growth has rebounded in recent months, consumers should remain cautious about spending and businesses about investment given the uncertain outlook.
Lagarde said the public health crisis will continue to weigh on economic activity and pose downside risks to the economic outlook. She added that the ECB remains prepared to adjust all of its tools at any time.
Many analysts expect the ECB to expand its EUR 1.35 trillion emergency bond purchase programme by around EUR 500 billion in December to provide renewed support to governments and businesses.
Reuters, citing sources, reported that some senior ECB officials have argued for increasing the size of the Pandemic Emergency Purchase Programme (PEPP) from the current EUR 1.35 trillion to EUR 2 trillion, but Lagarde opposes the suggestion.
Meanwhile, "hawkish" ECB officials believe the bank has downplayed some good news, such as the string of better-than-expected economic indicators released during the summer.
Reuters, citing insiders at the central bank, reported that the divergence was already evident at the last policy meeting in September.
According to the report, given the relatively favourable circumstances, the hawks want the bank to quietly reduce bond purchases to conserve firepower, so that it can accelerate purchases again without increasing the overall size of the pandemic emergency asset purchase programme when needed.
Some also noted that the bank's economic forecasts are too pessimistic because they do not take into account already announced fiscal stimulus measures, which will inevitably push up inflation.
The sources said both points were rejected by ECB Chief Economist Philip Lane, but Lane also declined calls to issue a clearer warning about the risks that euro strength poses to growth.
BOJ stands ready with additional measures. The summary of opinions from the Bank of Japan's September meeting, released on October 29, showed that some board members called for a review of the bank's policy strategy. With the pandemic hitting the economy and pushing inflation further away from its target, the bank is ready to respond quickly to any worsening of the crisis.
A Reuters article noted that the BOJ is in an increasingly difficult situation.
Several board members said the BOJ may need to find new ways to push inflation toward its 2% target, given the full impact of the pandemic on businesses and households.
"As economic conditions change very rapidly, achieving the price target is becoming increasingly difficult. Therefore, in order to achieve the price target, it is necessary to comprehensively review our strategy again," one board member was quoted as saying in the summary released that day.
"We may have to discuss the appropriate monetary policy course from the perspective of how to balance fighting the pandemic and maintaining economic vitality," another member said in the summary.
The summary also showed that some members said the BOJ must act "quickly" if the impact of the pandemic intensifies, and work closely with the government.
At its September policy meeting, the BOJ kept policy unchanged and took a slightly more positive view on the economic outlook than in July, suggesting there was no immediate need to expand stimulus.
But BOJ Governor Haruhiko Kuroda said the central bank would work closely with the government of new Prime Minister Yoshihide Suga, including on further easing, to protect the economy from the damage caused by the pandemic.
Kuroda also said the BOJ is prepared to extend its programmes aimed at easing corporate funding pressure, as the pandemic leaves the economic outlook highly uncertain. The programmes were originally due to end early next year.
"Depending on the impact of COVID-19, it is highly likely that we will extend the duration of the programme if necessary," Kuroda told a news conference after an online meeting with business leaders in Osaka.
"We will make the decision at an appropriate time, not at the last moment," he said.
The BOJ has stepped up purchases of corporate bonds and set up a loan facility to provide funds to businesses affected by the pandemic, as part of efforts to mitigate the economic impact of the outbreak. Both programmes are due to end in March next year unless the BOJ board votes to extend them.
UK puts negative rates on the table. To address the economic impact of the pandemic, the Bank of England is also carefully considering further easing, including the option of negative interest rates.
BoE rate-setter Silvana Tenreyro recently said the central bank's discussions on negative rates were "encouraging", suggesting the UK still might follow peers such as the ECB in taking rates below zero.
BoE officials have hinted that negative rates remain a possibility, warning that the V-shaped recovery faces risks. In an interview with The Telegraph, Tenreyro said: "In most countries, negative rates have almost entirely been passed through to lending rates. Banks have adapted well." However, BoE Governor Andrew Bailey played down the prospect of negative rates. He said negative rates were in the Bank of England's toolbox, but stopped short of indicating the bank might use them.
The UK economy is under mounting pressure, which could force the BoE to act. The worsening pandemic has prompted the government to impose new social restrictions, while changes to the wage support scheme have failed to ease concerns about a surge in UK unemployment.
The UK's Brexit transition period ends on December 31, and the country must agree a new trade deal with the EU before then, but the talks have run into trouble.
Most economists expect the BoE to expand its bond-buying programme later this year, while investors still expect the BoE to cut interest rates in 2021.
Tenreyro said the BoE needed to study the potential impact of the new job support scheme announced by Chancellor Rishi Sunak. She reiterated her view that the UK's strong summer growth after lockdowns ended, the so-called V-shaped recovery, would falter.
BoE policymakers said the recovery had been faster than they had expected a month earlier, and they voted unanimously to keep the main stimulus programme unchanged for now.
In the second quarter of this year, the UK suffered the worst economic contraction among the G7, with the economy shrinking by 20%. Like other central banks around the world, the BoE is studying how best to use its limited room for policy action.