Body
The near certainty of a major global recession means that governments must continue to harness both monetary and fiscal policy to soften the blow. Fiscal policy must do the heaviest lifting, but monetary policy can play an important role. The following timeline displays the actions taken by the central banks of the five largest economies: the US Federal Reserve (Fed), the European Central Bank (ECB), the People’s Bank of China (PBOC), the Bank of Japan (BOJ), and the Bank of England (BOE).
Not surprisingly, the PBOC acted first in the wake of the initial outbreak in China. Other central banks began to act in March, with the Fed taking the most aggressive early actions. The ECB and BOE have stepped up their responses in recent days. The BOJ has been less aggressive, in part because Japanese financial markets have shown fewer signs of stress and in part because the BOJ has less scope to ease policy.
Central bank actions take three forms:
- Reducing interest rates on safe assets by lowering rates paid by the central bank on its own liabilities and by buying more government bonds to push down their yields at various maturities, an action also known as quantitative easing (QE).
- Lending freely to banks, other financial institutions, foreign central banks, and even nonfinancial institutions with sufficient collateral.
- In their capacity as financial sector supervisors (or working with supervisory agencies), encouraging financial institutions to extend credit to firms adversely affected by the crisis.
In a crisis, ensuring the free flow of credit is essential to prevent sudden stops in lending and a cascade of defaults that would freeze up economic activity. The Fed set up programs in the Great Recession of 2008–09 that kept credit flowing and has proved willing to reestablish those programs quickly.
Reducing interest rates takes time to have an effect, making this action less useful to deal with the immediate drop in spending under way. The Fed and the PBOC can lower interest rates further if needed, especially on longer-term bonds. The BOJ and the ECB have very little scope to do so, with the BOE’s scope between that of the BOJ and the Fed. The ECB can help a lot by reducing the spreads of Italian and Spanish bond yields over German yields. Its recent announcement of a large increase in bond purchases coupled with flexibility in the allocation of purchases across countries suggests an intention to reduce those spreads.
Timeline of central bank responses to the COVID-19 pandemic |
|||
Economy |
Action type |
Description |
|
Feb 1, 2020 |
China |
credit |
announced multi-agency package to support financial system |
Feb 2 |
China |
credit |
increased bank liquidity via large repo operation |
Feb 6 |
China |
credit |
announced RMB300 billion of special re-lending through national and local commercial banks |
Feb 7 |
China |
regulatory |
announced steps to support bond issuance by financial institutions |
Feb 16 |
China |
monetary |
reduced medium term lending facility rate by 10 basis points (bp) |
Feb 19 |
China |
monetary |
reduced 1-year loan prime rate by 10bp and 5-year loan prime rate by 5bp |
Feb 25 |
China |
credit |
increased re-lending and re-discount quota; increased policy bank lending |
Mar 1 |
China |
credit |
announced temporary deferred repayment of principal and interest on loans to small and medium-sized enterprises |
Mar 1 |
Japan |
none |
stated BOJ is closely monitoring developments |
Mar 2 |
Euro area |
none |
stated ECB is closely monitoring developments and ready to act |
Mar 3 |
United Kingdom |
none |
stated BOE is monitoring the situation closely |
Mar 3 |
United States |
monetary |
reduced federal funds rate by 50bp (unscheduled) |
Mar 9 |
United States |
credit |
increased repo offerings by $75 billion |
Mar 11 |
United Kingdom |
credit |
reduced bank rate by 50bp; announced Term Funding Scheme with additional incentives for SMEs; maintained stock of corporate bond and gilts; reduced counter-cyclical capital buffer; communicated supervisory expectation that banks should not increase dividends or other distributions, such as bonuses |
Mar 11 |
United States |
credit |
increased repo offerings further |
Mar 12 |
Euro area |
credit |
announced additional long-term refinancing operations (LTROs) for banks, more favorable LTRO terms in upcoming operations, additional asset purchases, temporary capital, and operational relief to banks |
Mar 12 |
United States |
credit |
extended maturity distribution of Treasury security purchases; increased term repo operations by large amount (more than $1 trillion) |
Mar 13 |
Japan |
credit |
offered unspecified “ample” liquidity for repo market |
Mar 13 |
China |
monetary |
reduced bank required reserves by 0.5 to 1 percentage point |
Mar 15 |
United States |
credit |
reduced federal funds rate by 100bp to near zero; announced purchases of $500 billion in longer-term Treasury securities and $200 billion in agency mortgage-backed securities; reduced primary credit (discount window) rate by 150bp to 0.25 percent; announced miscellaneous other steps to support the flow of credit |
Mar 15 |
United States |
credit |
coordinated central bank action to enhance the provision of global US dollar liquidity |
Mar 16 |
Japan |
credit |
increased purchases of ETFs, JREITs, and loans secured by commercial paper and corporate bonds |
Mar 17 |
United States |
credit |
urged banks to use capital and liquidity buffers in joint supervisory statement |
Mar 17 |
United States |
credit |
announced Commercial Paper Funding Facility |
Mar 17 |
United Kingdom |
credit |
announced Covid Corporate Financing Facility |
Mar 17 |
United States |
credit |
announced Primary Dealer Credit Facility |
Mar 18 |
Euro area |
credit |
increased asset purchases by €750 billion through 2020 |
Mar 18 |
United States |
credit |
announced Money Market Mutual Fund Liquidity Facility |
Mar 19 |
United States |
credit |
established temporary dollar liquidity arrangements with additional central banks |
Mar 19 |
United Kingdom |
credit |
reduced bank rate 15bp; increased asset purchases by £200 billion; enlarged Term Funding Scheme |
Mar 19 |
Euro area |
credit |
clarified new asset purchases will be flexibly allocated across members |
Mar 20 |
Euro area |
credit |
reactivated swap line with Danmarks Nationalbank |
Mar 20 |
United States |
credit |
coordinated central bank action to further enhance the provision of US dollar liquidity |
Mar 20 |
United States |
credit |
expanded money market mutual fund liquidity facility to make loans secured by certain municipal money market mutual funds |
Mar 22 |
United States |
regulatory |
provided additional information to encourage financial institutions to work with borrowers affected by COVID-19 |
Mar 23 |
United States |
credit |
announced Treasury purchases and agency MBS in "amounts needed"; included commercial MBS in purchases; announced measures to provide a combined $300 billion in new financing, including $30 billion from the Exchange Stabilization Fund (ESF); established Primary and Secondary Market Corporate Credit Facilities; established Term Asset-Backed Securities Loan Facility enabling asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration, and certain other assets; expanded Money Market Mutual Fund Liquidity Facility and Commercial Paper Funding Facility |
Mar 24 |
Japan |
credit |
announced minor measures to maintain stability or repo market |
Mar 24 |
United Kingdom |
credit |
launched Contingent Term Repo Facility |
Mar 26 |
United States |
credit |
working with other financial supervisors, communicated to banks various regulatory actions to encourage lending |
Mar 26 |
United Kingdom |
none |
took no additional steps at regular policy meeting |
Mar 27 |
United States |
credit |
working with other financial supervisors, communicated to banks various regulatory actions to encourage lending |
ECB = European Central Bank; BOE = Bank of England; BOJ = Bank of Japan |
|||
Notes: Timeline reflects actions taken through March 27, 2020. Dates are based on central bank announcement time in US Eastern Time, available in the data appendix. |
Glossary
Counter-cyclical capital buffer: An extra amount of capital banks must hold in good times that can be relaxed in emergencies to prevent banks from tightening lending standards.
Discount window: A central bank lending facility that accepts a broad range of collateral, typically bank loans to households and businesses.
ETF: Exchange-traded fund. A collection of financial securities that is traded as a single security.
Gilt: Term for British government bonds.
JREIT: Japan real estate investment trust. A special purpose company that issues shares and holds a portfolio of real properties.
LTRO: Long-term refinancing operation. Tool used by the European Central Bank to lend to banks at terms of three months to three years.
MBS: Mortgage-backed security. A bond that is backed by hundreds of individual mortgage loans.
Prime rate: A benchmark interest rate for bank lending to high quality borrowers.
Repo: Short for repurchase agreement. This is a loan that is collateralized by high-grade securities, typically bonds issued or guaranteed by the government. Technically, the central bank purchases the securities, and the borrower promises to buy them back at a fixed price on a given date.
Required reserves: The fraction of bank deposits that must be held in an account at the central bank. In the United States and other countries that have engaged in large-scale asset purchases, or quantitative easing, banks typically hold a lot more reserves than are required.
SMEs: Small and medium-sized enterprises.
Term repo: Repo with a fixed term longer than overnight, often one month or three months.
Related Documents
File