Last week’s Bank of England Monetary Policy Council meeting wrapped up the latest round of policy assessments by the main central banks.
The ECB, US Federal Reserve and now the Bank of England, all kept policy on hold which was no surprise given the extensive loosening measures implemented in the first half of the year.
Their economic assessments were also quite similar.
Activity is rebounding following the lifting of most lockdown restrictions, with recent data proving stronger than expected.
However, central banks are cautious and think it will take at least a couple of years for economies to recover fully from this very deep recession – what the IMF has termed a partial recovery in the second half of 2020 and 2021.
They also emphasise that the outlook remains highly uncertain, with the risks still stacked to the downside.
Thus, monetary policy will need to remain very accommodative over the next number of years.
In this regard, the central banks indicated that they retain a clear easing bias, committing to implement even further policy loosening if required.
However, they also highlight the importance of fiscal measures at this time in supporting economies.
As Fed chair Jerome Powell put it, central banks have “lending powers not spending powers” and it is spending that will sustain the recent pick-up in economic activity.
In terms of their own remaining firepower, the clear preference of central banks is for further quantitative easing rather than moving rates even lower.
However, forward guidance could also be used in terms of signaling that rates will remain at their current very low levels for even longer, which should lend support to financial markets.
It is instructive that the ECB - led by Christine Lagarde - has eschewed lowering rates at all in response to the Covid-19 crisis, with the deposit rate already deeply negative at -0.5%.
The Fed is showing no appetite to cut rates further, with short-term rates hovering just above zero, the lower bound of the 0% to -0.25% range for the Fed’s key policy rate.
The Bank of England, which has been mulling over the idea of moving to negative rates, appears to be going cold on the idea, judging by some of it comments after last week’s meeting.
It believes such a move “at this time could be less effective as a tool to stimulate the economy” and that it still has other instruments available.
Negative UK rates, then, seem unlikely to be taken out of the bank’s tool box, certainly over the remainder of this year.
It would appear that the outlook for the economy would need to worsen a lot for the Bank to consider such a move, though it remains a policy option.
Markets have been listening to central bankers and have scaled back their expectations recently for further rate cuts.
Three-month interest rate futures contracts have largely priced out any further cuts by the ECB or Fed.
Short sterling contracts are barely pricing in a 10 basis point Bank of England rate cut, which would lower the bank rate to zero, but are not looking for official rates to go negative.
The big bazookas have been fired then, by both central banks and governments to re-ignite economic activity.
They must be hoping that the recovery is sustained, even if it takes a couple of years to overcome the deep recession, as there is not much firepower left in the locker should economies turn down again.