Challenging times for central banks: Low inflation, monetary policy, and digital currency

Challenging times for central banks: Low inflation, monetary policy, and digital currency

The coronavirus disease (COVID-19) outbreak has transformed the global monetary policy landscape. The sharp global economic slowdown caused by the spread of the virus and the various countermeasures embarked on by governments under states of emergency (such as quarantines, policies to restrict mobility, school closures, and restrictions and limitations on business operations) prompted many central banks to implement substantial monetary easing from March 2020 along with massive fiscal stimulus measures. As a result of these measures, a growing number of central banks have faced the effective (or zero) lower bound or approached it in their policy rates.

Central banks in the eurozone, Japan, and the United States (US) have scaled up quantitative easing (QE), i.e., the large-scale purchase of financial assets such as treasury securities, while negative interest rate policies have been maintained in the eurozone and Japan. The Bank of England resumed QE as its policy rate dropped to nearly 0%, and the bank allowed an extension of the government’s existing overdraft facility amid growing financing needs and pressures in the short-term funding markets. Among developed economies, central banks in Australia, Canada, and New Zealand faced the effective lower bound in March 2020 and initiated QE. Central banks in Brazil, Chile, Columbia, Hungary, Indonesia, the Philippines, Poland, the Republic of Korea, Romania, South Africa, and Turkey have also adopted QE, despite some still maintaining relatively large positive interest rates. Meanwhile, yield curve control, which has been used as an unconventional monetary easing tool in Japan since 2016, is being used by the Reserve Bank of Australia and is currently under examination by the US Federal Reserve, although the US and Australian central banks are both focusing on stabilizing a shorter yield compared to the 10-year yield chosen by the Bank of Japan.

Given this background, unconventional monetary easing tools are no …continue reading