Spring 2021: How can central banks exit QE?

Spring 2021 Vol.12 Ed.2

Fifteen months after Covid-19 first took root in the global conscience, some countries are (perhaps prematurely) starting to consider exit strategies for their economies and societies. Central banks face arguably the most daunting task of all in managing the long-term effects of the pandemic.

Breaking out of the cycle of quantitative easing will be hellishly difficult. Clearly unprecedented levels of QE were inevitable given the shutdown of many economies. But have central banks made decisions – many of them before the onset of Covid – that today leave them stuck between a rock and a hard place?

In this quarter’s Bulletin cover story, former International Monetary Fund deputy director Tamim Bayoumi makes a compelling case that they have done so. Central banks have focused their enormous firepower on buying bonds, for good reason. But there is a risk now, as Bayoumi explains, that the ‘policy becomes never-ending, with periods of gradual reduction being interrupted by buying sprees’. Bayoumi argues that central banks must be more transparent about their QE exit strategies and that it remains an emergency measure. He goes further and suggests that if there is another economic shock, they should buy equities rather than bonds – taking a leaf out of the Hong Kong Monetary Authority’s successful policy during the 1997 Asian financial crisis.

But buying equities has its own drawbacks, as Jesper Koll of Wisdom Tree writes. The Bank of Japan today owns about 10% of Tokyo’s benchmark equity index. This is stifling any hope of a market-led recovery.

Could debt cancellation be another route to exiting QE? OMFIF’s Chris Papadopoullos looks at how central banks’ reserves systems are increasingly putting their independence at risk and examines how they can escape fiscal policy and debt management traps.

Meanwhile, Joe Biden’s first 100 days as US president have reinvigorated finance’s efforts to combat climate change. Contributing editor Philip Moore rounds up the views of leading issuers, investors and policy-makers from an OMFIF/DZ Bank event that spanned 10 hours and three time zones.

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