Talk about blowing hot and cold with just two adverbs. After indicating 10 days ago that the Bank of England was “urgently” looking at negative interest rates, the U.K. central bank’s chief economist, Andy Haldane, said on Tuesday that it wasn’t “remotely” close to making a decision on the matter.
Look beyond the apparent contradiction, however, and it seems clear that Haldane is describing the same policy. And that policy is similar to that of other major central banks: in the current context, they have to keep sending the message that they can and will use every tool, including radical or unprecedented ones, to help governments fight the coronavirus crisis. Or, to quote Haldane’s boss, the BoE governor Andrew Bailey, as far as negative rates are concerned, not ruling them out doesn’t mean ruling them in.
Just dangling the possibility of negative rates may be a message strong enough that the measure doesn’t have to be used. But, in truth, there is little that negative rates can do in the current crisis. Look at the ECB, whose move to push its -0.4% key rate down to -0.5% in March didn’t amount to much, save for the signal it sent that it was serious about fighting the virus-induced recession.
Lower interest rates won’t do much for a suppressed economy, when few businesses or households are happily contemplating taking on more debt. What central banks can do is watch the banking system, make sure liquidity is abundant, and take care of bond markets to allow governments to be able to fund the jumbo fiscal stimulus plan they have unleashed on their respective economies.
That is why the tool of the day is bond-buying, also known as quantitative easing, and the key word there is “flexibility” — meaning the ability to do even more, over a longer period than originally announced. Both the Bank of England and the European Central Bank have launched pandemic-specific asset-buying programs that will run out at some point this summer. And it is already clear that the BoE’s £200 billion ($246 billion) and the ECB’s €750 billion ($822 billion) will increase in size, and that they will run for longer.
Listen to Ben Broadbent, a deputy governor of the BoE, who said two weeks ago that it was “quite possible” the Bank would increase its QE program. Or to ECB executive board member Isabel Schnabel, who just hinted in an interview that the pandemic-focused bond-buying program could be increased as soon as next week. The day before, Bank of France governor François Villeroy de Galhau, another member of the ECB’s governing council that will meet next week, said that the bond-buying program was the cornerstone of the central bank’s action and that it was flexible. “We are open on volume, we are open on the end date,” he insisted.
It is a safe bet to assume that both central banks will spend more on asset-buying this year than they initially planned or announced. And that they will announce this sooner rather than later. How long the bond-buying game will go on, on the other hand, depends on how fast and how strong the post-lockdown recovery will be. And that is the major uncertainty.