GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
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GLOBAL CENTRAL BANK RESPONSES TO
THE COVID-19 PANDEMIC
March 2021
“Boy, that escalated quickly.” ~ Anchorman Ron Burgundy1
As the acute phase of the monetary policy response to COVID-19 appears to have ended, we review and
summarize in this paper key actions global central banks took to influence aggregate demand and fulfill
their responsibilities as lenders of last resort. Actions taken by the US Federal Reserve (Fed), European Central
Bank (ECB) and others included the creation of enhanced liquidity provisions, policy rate reductions, en-
hanced asset purchases, offering additional forward guidance, yield curve control (YCC)-type policies as well
as regulatory measures. Most of these measures helped contain the economic damage, but unwinding most
of them when the time is ripe will be a challenge.
KEY TAKEAWAYS
Central banks around the world reacted with speed and force in March 2020—using a
dizzying array of partly new policy tools—to combat the detrimental economic effects of
the COVID-19 pandemic.
While the response time was much faster than during the global financial crisis (GFC)
in 2008/2009, the GFC did serve as a “dry run” for many of the most effective policy
measures, in particular quantitative easing (QE).
Indeed, we believe QE can be viewed as the “winner” of this crisis, as it was used forcefully
Andreas Billmeier by developed market (DM) central banks to influence the yield curve; even some
Sovereign Research Analyst
emerging market (EM) central banks started to successfully use this tool to
stabilize markets.
On the other hand, major EM central banks were generally more cautious than their DM
counterparts regarding rate cuts, often driven by exchange rate concerns.
More generally, we find interesting similarities but also critical differences across central
banks, and the pattern is not necessarily driven by the standard DM/EM distinction.GLOBAL CENTRAL BANK RESPONSES TO THE
COVID-19 PANDEMIC
By Andreas Billmeier2
“Boy, that escalated quickly.” ~ Anchorman Ron Burgundy1
Introduction
Most monetary policy instruments reflect the two key roles of a modern central bank on an abstract level: setting
the monetary policy stance to influence aggregate demand and being the lender of last resort (LOLR) to banks
and, potentially, non-banks. In addition, many central banks have at least some regulatory and supervisory respon-
sibilities and are increasingly concerned about financial stability. All of these roles became critical elements of the
policy response during the COVID-19 crisis last year.
Central banks’ responses can be broadly grouped into the following buckets of instruments: enhanced domestic
“In response to liquidity provision, policy rate actions, enhanced asset purchases and “other” (which includes forward guidance,
the pandemic, yield curve control, international liquidity and regulatory/supervisory measures). We will discuss what central banks
all major central used which instruments with a particular focus on asset purchases where the most “innovation” took place. Exhibit
2 in the Appendix attempts to provide a visual summary.
banks quickly
expanded their Domestic Liquidity Provision3
A central bank’s LOLR responsibility requires it to provide adequate liquidity to the financial system. This is partic-
liquidity provision
ularly important in times of evaporating market liquidity and a “dash for cash” as became evident last year when
programs …” COVID-19 first arrived. In response to the pandemic, all major central banks quickly expanded their liquidity provision
programs and most developed market (DM) central banks also relaxed their requirements for the collateral pool.
The Fed scaled up its open market operations on March 12, 2020, offering term operations in addition to standard
overnight transactions and even moved to holding several auctions per day as liquidity demand spiked. On March
15, the Federal Open Market Committee (FOMC) decided to set reserve requirements for all tranches to zero, thereby
releasing additional liquidity into the system.
The European Central Bank (ECB), on the other hand, prevented a potential credit crunch triggered by banks’ short-
term liquidity concerns by announcing on March 12, 2020 additional weekly bridge financing into the (previously
scheduled) first Targeted Longer-Term Refinancing Operation (TLTRO) III settling in June. At the same time, the
ECB eased the conditions for all TLTROs between June 2020 and 2021 on a number of fronts, including by making
conditions especially attractive for banks that do not reduce lending into the economy. On April 7 of last year, the
ECB followed up by adopting a package of temporary collateral-easing measures to facilitate participation in the
TLTRO, including accepting Greek debt as collateral and reducing collateral valuation haircuts. In a further step
on April 30, the ECB recalibrated the forthcoming TLTROs once more, bringing the interest rate to -0.5% and to
-1.0% for banks that qualify for the lending threshold, and the start of the lending assessment period was also
brought forward to March 1. At the same time, the ECB announced additional monthly Pandemic Emergency
Longer-Term Refinancing Operations (PELTROs), to replace the bridge LTROs announced in March with maturities
in 3Q21. In the policy meeting on December 10, 2020, the ECB extended the favorable TLTRO conditions by a full
year, to June 2022, and increased banks’ borrowing entitlement.
1 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
Other central banks took similar measures to support and scale up domestic repo and related markets in March
2020.4 Among these, the Bank of England (BoE) introduced a new Term Funding Scheme for Small and Medium-Sized
Enterprises (TFSME) to provide that specific segment of corporate borrowers with a tailored facility. The BoE also
rolled out a new COVID-19 Corporate Financing Facility geared at larger companies emitting commercial paper
in cooperation with Her Majesty’s (HM) Treasury and the Contingent Term Repo Facility (CTRF). Japan announced
measures to support the repo market. In Sweden, the Riksbank added weekly unlimited term repo facilities (with
terms of 3 and 6 months) to provide banks with appropriate liquidity, and decided to lend SEK 500 billion to banks
against collateral for two years in order to support the extension of corporate credit.
“One interesting
feature of this However, very few central banks have widened the circle of counterparties beyond traditional banks, for example,
the Fed, the Bank of Japan (BoJ) and the Riksbank, which included non-bank financial institutions (cooperatives)
global rate cutting in late March 2020. Similar to the Fed, the Reserve Bank of India (RBI) also introduced a support mechanism for
cycle is that all DM mutual funds. In China, liquidity provision to non-banks occurred mainly via the policy banks.
central banks that Policy Rates
did cut reached the Turning to the second major monetary policy tool, many central banks around the world—both DM and EM—have
practical zero lower cut rates in response to the demand shock. One interesting feature of this global rate cutting cycle is that all DM
central banks that did cut reached the practical zero lower bound, but they did not cut below zero. In fact, since
bound, but they did
the global financial crisis, the hurdle to cut into negative territory seems to have increased. On the other hand, all
not cut below zero.” three G-10 central banks already sporting negative policy rates prior to the pandemic—the ECB, the BoJ and the
Swiss National Bank (SNB)—have not cut rates since March last year.
Exhibit 1: G-10 Central Banks’ Cumulative Policy Rate Changes
100
0
-100
-200
Basis Points
-300
-400
-500
-600
-700
Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20 Sep 20 Oct 20 Nov 20 Dec 20 Jan 21 Feb 21
Source: Haver, central bank data. As of 28 Feb 21.
Half of the policy rate cuts made by G-10 central banks (315 bps out of a total of 655 bps5) came during the third
week of March after the Fed had anticipated its regular meeting by a few days (Exhibit 1). On Sunday evening, March
15, the Fed cut the fed funds target rate by 100 bps, bringing it to zero—a clear signal to the world of just how
concerned the FOMC had become at that stage. On the same day, Canada, Norway and New Zealand also cut their
interest rates. In fact, this was already the second cut by the Fed after a 50-bp reduction earlier that month (on March
3), which coincided with cuts made in Canada and Australia and “close monitoring” in the eurozone and the UK.
Four G-10 central banks did not participate in the cutting cycle: the BoJ, the SNB, the Riksbank and, of course, the ECB.
The Riksbank appeared particularly unwilling to return to negative rates territory after just having successfully exited.
The other central banks judged repeatedly that rate cuts, while in principle possible, were not the most effective
2 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
tool at that juncture, including because the rate levels were, arguably, close to the de facto lower bound. These
central banks engaged in alternative easing policies, most prominently asset purchase programs of various sorts.
For the ECB in particular, the question about the “reversal rate” came to the fore. The deposit rate acted as the de
facto policy rate given full allotment. Would a meaningful cut below the level of -50 bps—in place since September
2019—produce a significant easing in monetary conditions or would it trigger a counterproductive reaction from
banks to safeguard interest income? While the ECB repeatedly stated that it had not reached the reversal rate, it
also viewed further front-end cuts into more deeply negative territory as less effective compared to asset purchases.
Among major EM central banks, the interest rate response was a lot more cautious and driven by country-specific
concerns, such as exchange rate depreciation. The Chinese central bank did not change its key rate, the loan prime
“Among major
rate (LPR), but did adjust a number of auxiliary interest rates as early as mid-February in response to the crisis. For
EM central banks, Brazil, the economic crisis extended a long-lasting cutting cycle that would have otherwise probably petered out.
the interest rate The Banco Central do Brasil (BCB) was hesitant at first given the ongoing depreciation of the real and cut the Selic
rate by only 50 bps on March 18. The more significant cuts (75 bps each) came in May and June before a final 25-bp
response was a
cut in August. Therefore, this appears to be rather a response to the incoming economic data once the currency
lot more cautious situation had stabilized somewhat instead of aggressive front-loaded rate cuts along the lines of most developed
and driven by market (DM) central banks. Russia presents a similar picture: the Central Bank of Russia (CBR) kept rates stable at 6%
until late April when it cut by 50 bps, followed by two more cuts, in late June (100 bps) and a final July cut (25 bps)
country-specific
before indicating most recently that the cutting cycle had come to an end. India and South Africa were arguably
concerns, such the most aggressive major EM central banks. The Reserve Bank of India (RBI) anticipated its regular meeting in early
as exchange rate April into the previous fiscal year (March 27) and cut the policy rate by 75 bps. Similarly, the June meeting was shifted
to May 22 and the repo rate was cut by another 40 bps. The August meeting took place as planned and the policy
depreciation.”
rate has remained unchanged since. Finally, the South African Reserve Bank (SARB), which is similar to the RBI in that
it is on a bimonthly meeting cycle, cut its policy rate by 100 bps at its regular meeting in late March, then inserted
another extraordinary meeting in mid-April to make another 100-bp cut. At the regular meeting in late May, the
SARB cut another 50 bps, and a further 25 bps in late July, but the central bank has refrained from further cuts since.
Balance Sheet Measures, Quantitative Easing and Asset Purchases
Quantitative easing (QE) is defined as expanding a central bank’s balance sheet to (semi-) permanently acquire assets
held by the private sector without sterilization, resulting in an easing of monetary conditions beyond the natural
limits of nominal interest rates; it has been used in Japan since the early 2000s to create excess reserves and flush the
system with liquidity. Several other central banks have gained experience with large-scale asset purchase programs
over the last decade or so, including the US and the UK during the GFC, and the ECB and Riksbank starting in 2015.6
As the COVID-19 crisis unfolded, central banks around the world, both with and without previous QE experience,
started to engage in or scaled up their outright large-scale asset purchase programs (LSAPs), either to ease the
monetary stance (or prevent it from tightening) or to tackle dysfunctionality in specific markets, morphing essen-
tially from a lender to a dealer of last resort. Most central banks—but not all—focus on domestic assets, which
customarily includes sovereign debt but also, often, corporate debt.
The Federal Reserve
The Fed announced on March 15, 2020 that, in tandem with the 100-bp rate cut, it was also going to purchase
at least US$500 billion in Treasuries and US$200 billion in agency mortgage-backed securities (MBS) to “support
the flow of credit to households and businesses.” This was only the starting point for the Fed’s asset purchases as
the numerical targets were removed barely a week later (March 23) and commercial MBS added to the purchase
program. By August, the Fed’s purchases of Treasury securities had stabilized at around US$80 billion per month.
3 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
In an eerie repetition of events during the GFC, the Fed also responded around the same time, on March 18, to
the broad flight to safety by investors and associated massive redemptions from money market mutual funds
(MMMFs) by introducing the Money Market Mutual Fund Liquidity Facility (MMLF). By making advance funding
available to eligible counterparties to purchase certain assets from the MMMF, the Fed wanted to avoid having to
“break the buck” as market conditions did not allow market participants to liquidate their assets in a timely fashion.
While this summarizes only very roughly some of the key policy decisions of the Fed to counteract market stress
“… when a prob- and support the economy, the upshot is quite simple and representative of the Fed’s strategy throughout this
lem became appar- crisis: when a problem became apparent, the Fed reacted without hesitation—a lesson from the GFC. Additional
policies reflecting this simple mantra were implemented in two major steps, on March 23 and April 9. In doing so,
ent, the Fed reacted
the Fed also went clearly beyond its standard LOLR role in that it engaged directly with non-financial corporates:
without hesita-
tion—a lesson from On March 17, the revival of the Primary Dealer Credit Facility (PDCF), providing the ability for members of
this circle to access term funding (up to 90 days) against collateral (investment-grade debt and equity secu-
the GFC.” rities). This facility had been introduced during the GFC, but at the time it only provided overnight liquidity.
On March 23, the creation of the Primary and Secondary Market Corporate Credit Facilities (PMCCF/SMCCF)
to provide a direct funding backstop for large corporates (Primary) as well as to support market liquidity
for corporate debt by purchasing individual bonds and ETFs. These facilities are largely geared at invest-
ment-grade corporates and fallen angels. Purchases were initiated in May (under the SMCCF) and became
fully operational by end-June.7
On the same date, the establishment of the Term Asset-Backed Securities Loan Facility (TALF), under which
the Fed can lend to holders of AAA rated ABS backed by new consumer loans including student loans,
credit card loans, auto loans as well as small business loans.
On April 9, 2020, the introduction of the Municipal Liquidity Facility (MLF) to counter market stress experi-
enced by state and municipal borrowers.
On the same date, the creation of the Main Street Lending Program (MSLP) to purchase qualifying loans of
lenders to small and mid-sized businesses and nonprofit organizations.
Also on April 9, the creation of a liquidity facility based on the Small Business Administration’s Paycheck
Protection Program (PPPLF), geared at enabling small companies to furlough employees rather than fire them.
European Central Bank
The ECB experience presents an interesting contrast. With rate cuts deemed ineffective, its policy response focused
on liquidity provision (discussed earlier) and balance sheet measures, foremost an aggressive version of QE. On
March 12, the ECB announced, among other things, a temporary envelope of additional net asset purchases of
€120 billion for the rest of the year (i.e., about €13 billion per month on top of the €20 billion under the standard
Asset Purchase Program (APP) in place since November 2019). It is worth noting that a simple augmentation of
the existing APP substituted, in a way, for several new and separate Fed tools as the ECB’s APP already purchased
assets in a variety of markets, namely sovereign and corporate bonds, as well as ABS and covered bonds, a European
specialty. This top-up was meant to safeguard favorable financing conditions in the eurozone although the ECB
had not yet witnessed any severe market strains.
These market strains appeared very quickly, however: Barely a week later the ECB changed tack and launched, on
March 18, a temporary Pandemic Emergency Purchase Program (PEPP) worth €750 billion for the remainder of
2020, or about €80 billion a month in addition to the roughly €30-€35 billion of purchases already performed under
previously adopted programs.8 The discerning element of this facility rested in its flexibility: contrary to previous
eurozone-wide purchase programs that were fulfilled in observance of the ECB’s capital key, the PEPP was (at least
temporarily) able to “go where it hurt” in terms of distribution over time, across jurisdictions and asset classes.9
4 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
At the same time, the ECB also added commercial paper to the Corporate Sector Purchase Program (CSPP) and
broadened the pool of assets eligible for collateral. The central bank also committed to review self-imposed limits,
which was an important element of the announcement as the PEPP could have potentially hit certain purchase limits
quite quickly. On June 4, the PEPP was augmented by another €600 billion to €1.35 trillion and extended to last at
least until June 2021.10 Notably, this extension did not change the theoretical pace of average monthly purchase
amounts (around €100-€110 billion) across programs, but did have a dovish impact stemming purely from the
extension itself. The ECB also committed to reinvesting principal payments under the PEPP until at least end-2022
as a signal that a reversal of the policy stance was not imminent. On December 10, the ECB added another €500
billion to the PEPP envelope, in conjunction with extending the favorable TLTRO conditions as discussed earlier. In
“The PEPP has now policy communications since, the ECB has repeatedly underlined that the current PEPP envelope of €1.85 trillion
become the ECB’s could be further increased or not used in full, depending on the recovery progress.
main tool to guar- The ECB broke new ground with the PEPP as this program is more flexible than the APP, both intellectually, and in
antee appropriate a de facto sense (the PEPP was not required to respect the capital key at every step and could even purchase Greek
‘financing condi- bonds not eligible under the APP). It distinguishes several intervention layers, meant in one part to implement the
expansionary monetary stance valid across all eurozone countries when close to the lower bound for nominal
tions’ across the interest rates and in another, more chiseled part, meant to combat problems with monetary policy transmission
eurozone.” in certain jurisdictions and even specific markets as necessary. The PEPP has now become the ECB’s main tool to
guarantee appropriate “financing conditions” across the eurozone.
Other Central Banks
Among other DM central banks, the BoJ stepped up purchases of a variety of assets on March 16. On the same day, the
Riksbank decided to augment its existing bond holdings by up to SEK 300 billion in nominal and real federal and local
government bonds as well as covered bonds before the end of the year. In two further steps, (in July and November 2020),
the envelope was augmented to (ultimately) SEK 700 billion and the purchase window was extended to end-December
2021. The BoE increased its asset purchases by £200 billion in the unscheduled meeting on March 19 and then again
in June and November by an additional (combined) £250 billion as the economy went through economic setbacks
related to the ongoing pandemic. The Reserve Bank of Australia (RBA) introduced on March 18 an APP with two very
specific characteristics: it focused on government bonds with a 3-year maturity due to the pivotal importance of that
point of the yield curve in the domestic interest structure, and set a target yield equal to the cash rate—in other words,
a flat front end of the yield curve. In addition, the RBA also initiated a bond buying program that includes subnational
issuers for a total of AUD 200 billion and that is expected to last until September 2021. Meanwhile the Reserve Bank of
New Zealand (RBNZ) decided on its large-scale asset purchases (LSAP) at the meeting on March 22. In several subse-
quent steps in April, May and August, the program size was raised from AUD 30 billion to AUD 100 billion, additional
bond classes were added, and the program was extended from March 2021 to June 2022. The last G-10 central bank to
launch an APP was the Bank of Canada on March 27, focusing on the government debt and commercial paper markets.
Switzerland and Norway are the two DM central banks that have, instead, focused on intervening in external mar-
kets, albeit for opposite reasons. While foreign currency (FX) interventions are customarily viewed as an exchange
rate policy, the line between that and QE is blurred. Switzerland has historically engaged in a special form of QE:
purchasing FX largely without corresponding sterilization of the liquidity injection—implying a “longer” balance
sheet to prevent the exchange rate from appreciating. The SNB’s foreign currency reserves have increased by around
CHF 130 billion between March 2020 and the end of the year, corresponding to almost 20% of GDP. Norway’s in-
tention in March was the opposite—intervene to support the domestic currency after a significant depreciation
triggered by the selloff in crude oil prices and correlated assets. Norges Bank did not launch a domestic LSAP
because it deemed that the government bond market had little impact on other interest rates in the economy
and real activity, in addition to being a lot smaller and less liquid than elsewhere.
5 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
Adopting QE-type policies in EMs offers a slightly different angle on monetary policy. Contrary to DMs, policy
rates in EMs may be at historical lows but are—with a few exceptions—not at zero, let alone in negative territory.
That implies that a purchase program has little to do with easing the policy stance when nominal policy rates are
unable to do so. Instead, introducing QE in EMs intends to support markets that have become illiquid, although
the definition of illiquidity lies very much in the eye of the beholder. Historically, a lack of credibility would often
imply that purchases of government debt by an EM central bank resulted in FX selloffs and inflation rather than
in a market stabilization, but the experience of many EMs during this most recent crisis has been the opposite.
Among the major EM central banks covered here, South Africa’s SARB and the RBI have purchased government
securities, the latter partly in a variation of the Fed’s “operation twist.”11 The BCB received a mandate to do so, but
hasn’t yet. While there are many other EM central banks that have bought at least some government bonds, none
of the major EM central banks has ventured beyond the sovereign in terms of domestic assets, but several have
intervened in FX markets (e.g., Brazil and Poland).
A separate but related topic is the amount of intervention, with the major distinction being “unlimited” or not.
Some DM asset purchase programs are ex ante limited, for example the ECB’s PEPP and, initially, the Fed’s pro-
gram. That said, the Fed, but also the BoJ and the RBA due to their YCC commitments, have ultimately opted for,
in principle, unlimited interventions. The SNB, as it is a purchaser of FX, can also engage without limits, at least in
theory. Norges Bank, on the other hand, was limited in its support for the domestic currency by the foreign assets
it deems “for sale.” Similarly, many of the major EM central banks are more or less active in FX markets, but, to the
extent that they are supporting their respective currencies, their interventions have a natural limit. This intervention
is not necessarily related to the pandemic, but the degree of sterilization can be obviously varied over time, with
additional domestic liquidity providing a stimulative effect if needed.
Other Measures
In this section, we summarize several other instruments that all deserve more space in principle but where the
implementation has been quite homogenous. For example, most DM central banks have adopted or changed
their forward guidance as a result of the COVID-19 pandemic. One striking exception in this context is the SNB. Only
two central banks have engaged in YCC: For the BoJ, YCC has been part of its policy stance since 2016. The RBA,
as mentioned in the previous section, has committed to keep yields for the 3-year maturity point in government
bonds equal to the policy rate. As the target of the RBA operation is a specific shape of the yield curve rather than
a specific purchase quantity, the measure is already closer in spirit to YCC than “classic” QE.
“The response of All central banks across DMs and EMs (or the respective bank regulators) have adopted regulatory and super-
leading global visory measures geared at easing the burden on banks. Partly, this was done in the international environment
central banks … (delaying the introduction of certain Basel III requirements), partly in the domestic realm. The latter includes
enabling banks to use (countercyclical) capital and liquidity buffers but also weighing on them to limit or even
was speedy, target- cancel dividend payments to prop up their balance sheets. Official guidance regarding dividends and share
ed, and for the most buybacks has been softened only very recently. Some countries also conducted fiscal policy operations geared
part, well-coordi- at bank lending (e.g., guarantees) in close coordination with monetary policymakers, but this topic is beyond
the scope of this paper.
nated with fiscal
policymaking with- Summary
The response of leading global central banks to the challenges brought about by the COVID-19 pandemic was
out putting central
extraordinary in many ways. It was speedy, targeted, and for the most part, well-coordinated with fiscal policymak-
bank independence ing without putting central bank independence in acute danger. This reaction was straightforward as the initial
in acute danger.” demand shock lowered the inflation outlook around the world and there was no trade-off between fiscal stimulus
and low inflation. The reaction strategy was also straightforward in a different sense: banks could be “used” to fight
6 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
the economic devastation of the pandemic as they have, following a decade of building up capital and liquidity
buffers, not been a concern for policymakers in this crisis—the opposite of the GFC experience.
The “winner” of this crisis is QE: First, it morphed from a tool to influence inflation expectations to an integral part
of expressing the monetary stance. Second, the amounts deployed have often dwarfed similar efforts during
the GFC and the subsequent period of low inflation. Finally, a significant part of the EM world has also started to
successfully use this tool to stabilize markets. This should be seen as a major accomplishment because EM central
“… the biggest banks purchasing government bonds—even if on the secondary market—would have been a major red flag for
question of them EM investors not too long ago. Up to now, these historic concerns have been largely unfounded during this most
recent crisis.
all remains unan-
swered for now The two major central banks (the Fed and ECB) were in the middle of a strategy review when the crisis hit. The Fed,
… what happens further ahead in the process, decided to finalize its new framework and essentially became more ambitious on the
employment leg of its dual mandate—a good commitment tool in the middle of a crisis. The ECB, on the other
when the global hand, suspended work on its review process last year, but has restarted it since. The ECB’s conclusions will certainly
monetary policy be less geared at employment than the Fed’s, but the ECB should nevertheless be ambitious in tackling other issues
stance needs to go that have been building up over the last two decades, for reasons that mirror those of the Fed. In the end, the
response to the COVID-19 pandemic has raised many questions about central banking and the conduct (and limits)
into reverse?” of monetary policy—and it is not clear a priori what role an employment target should play in monetary policy
going forward. In fact, the biggest question of them all remains unanswered for now but is already moving to the
center of the markets’ attention: what happens when the global monetary policy stance needs to go into reverse?
ENDNOTES
1 Ferrel, Will and McKay, Adam. “Anchorman: The Legend of Ron Burgundy,” Apatow Productions, 2004.
2 With comments to an earlier draft from Western Asset Portfolio Manager John Bellows, Portfolio Manager Richard Booth, Co-Head of
Global Portfolios Gordon Brown, Portfolio Manager Dean French, Portfolio Analyst Matt Hodges and Portfolio Manager Kevin Ritter.
3 With respect to international or FX liquidity, the Fed, and to a lesser extent the ECB, provided liquidity to other central banks globally
via standing and renewed swap facilities for key central banks since mid-March. To prevent selling of assets in illiquid markets, the Fed
also established a new repo facility wherein other central banks that did not have access to the swap window could borrow US dollars
against US Treasuries and other qualified collateral.
4 In fact, most central banks around the world have taken steps to support the banking system directly via a more robust repo market,
often to include term lending against collateral. Many central banks also have introduced separate lending programs to benefit the
corporate sector. This section only highlights selected examples among G-10 central banks.
5 Cumulative unweighted, including the two laggard cuts by Norges Bank in May 2020 and the RBA in November 2020, and abstracting
from the Riksbank hike in early January 2020.
6 The ECB had expanded its balance sheet marginally in 2009 to kickstart the frozen covered bond market.
7 Eligible issuers for both facilities also included “fallen angels”—corporates that were rated investment-grade at the time of the intro-
duction of the program but downgraded subsequently, though not below BB-/Ba3.
8 See An ECB PEPP Talk.
9 The capital key reflects the capital contributions of eurozone and other European central banks to the ECB (although the ECB’s LSAPs
obviously focused on eurozone countries). Data provided by the ECB suggest that purchases under the PEPP were never very far from
the capital key. In the first two months, however, it did buy substantially more Italian government bonds and, to a lesser extent, Span-
ish and German bonds than what would have been indicated by the capital key but it fell short on French and supranational bonds.
Moreover, the weighted average maturity of bonds purchased was substantially lower than the eligible universe of bonds for Germany.
Over the summer, the ECB reduced the shortfall in French bonds significantly and the overshoot in Italian bond purchases and, more
broadly, has come more in line with what one could expect under the capital key. The ECB is still somewhat behind as far as expected
supranational bond purchases are concerned, but that is not a major surprise given forthcoming issuance under various EU programs.
10 See Sticking to the Brief—ECB Back to Focusing on Inflation Outlook.
11 Similarly, Banxico’s switch auctions serve to relieve stress in a particular section of the yield curve, leading to a net reduction of DV01 in
the market.
7 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
Exhibit 2: Summary of Central Bank Actions in Response to the COVID-19 Pandemic
Enhanced Liquidity Policy Rates (Changes/ Enhanced Asset Other
Provision Level) Purchases Measures
To To Broaden Cuts "Zero" Nega- Sov. Corpo- For- “Unlim- Add. Fwd. YCC Regul/
Banks Non- Collat. tive rate* eign ited” Guidance Super-
banks Pool vision
Federal Reserve • • • • • • • • • •
European Central
• • • • • • •
Bank
Bank of England • • • • • • •
Bank of Japan • • • • • • • • •
Riksbank • • • • • • •
Norges Bank • • • • • • •
Reserve Bank of
• • • • • • • • •
Australia
Reserve Bank of
• • • • • • •
New Zealand
Swiss National
• • • • • •
Bank
Bank of Canada • • • • • • • •
Banco Central do
• • • • •
Brasil
People's Bank of
• • • • • • •
China
Reserve Bank of
• • • • • • •
India
Central Bank of
• • • • •
Russia
South African
• • • •
Reserve Bank
Source: Central bank communications. As of 28 Feb 21.
The table mainly summarizes additional policy measures taken in response to the economic consequences of the COVID-19 pandemic (except for negative policy rates and
YCC). This distinction is not always clear-cut. For example, the ECB has widened the collateral pool for existing open-market operations, whereas other central banks have
introduced completely new liquidity tools that include a certain collateral pool. In the latter case, the measure is not qualified as a "broader collateral pool" and the key
intention was different.
* Including commercial paper.
DEFINITIONS
Yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling
as many bonds as necessary to hit that rate target.
A repurchase agreement, or repo is a contract under which the seller commits to sell securities to the buyer and
simultaneously commits to repurchase the same (or similar) securities from the buyer at a later date (maturity
date), repaying the original sum of money plus a return for the use of that money over the term of the repo. If the
collateral has a volatile price history the buyer is at risk. To reduce this risk, a haircut is imposed. The haircut is some
percentage of the market value the buyer holds back from the cash payment to account for the price volatility as
well as counterparty risk.
Zero lower bound is the lower limit that rates can be cut to, but no further. When this level is reached, and the
economy is still underperforming, then the central bank can no longer provide stimulus via interest rates.
8 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
The Group of Ten (G-10 or G10) refers to the group of countries that agreed to participate in the General Arrange-
ments to Borrow (GAB), an agreement to provide the International Monetary Fund (IMF) with additional funds to
increase its lending ability
A fallen angel, in the investing world, is a bond that was initially given an investment-grade rating but has since
been reduced to junk bond status.
Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody’s Investors Service and AAA, AA, A and
BBB by Standard & Poor’s Ratings Service, or that have an equivalent rating by a nationally recognized statistical
rating organization or are determined by the manager to be of equivalent quality.
A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).
Targeted longer-term refinancing operations (TLTRO) is a program of the European Central Bank designed to
provide liquidity to the financial sector.
Pandemic emergency purchase programme (PEPP) is a non-standard monetary policy measure initiated in March
2020 by the European Central Bank to counter the serious risks to the monetary policy transmission mechanism
and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak.
A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection
of mortgages.
An Exchange Traded Fund (ETF) is an unmanaged compilation of multiple individual securities and typically
represents a particular securities index or sector of the securities market.
The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contrac-
tionary for lending.
The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers.
In April 2020, the ECB launched a new series of seven additional longer-term refinancing operations, called
pandemic emergency longer-term refinancing operations (PELTROs).
A large-scale asset purchase (LSAP) is a monetary policy tool otherwise known as quantitative easing or printing
money.
A money market fund (MMMF) is a kind of mutual fund that invests in highly liquid, near-term instruments.
Domestic liquidity means the sum of (a) all unrestricted cash and Cash Equivalents owned by a domestic Credit
Party and held in the United States and (b) availability under the Revolving Credit Facility.
Collateral pool is a collateralisation technique that enables an institution to make collateral available to a coun-
terparty without allocating it to a specific transaction.
Bridge financing is a form of temporary financing intended to cover a company’s short-term costs until the mo-
ment when regular long-term financing is secured.
9 March 2021GLOBAL CENTRAL BANK RESPONSES TO THE COVID-19 PANDEMIC
Policy banks of China refer to two Chinese banks set up by State Council of China in 1994, namely The Export–Import
Bank of China (Exim) and the Agricultural Development Bank of China (ADBC). The two banks aim at implementing
economic policies of the government and conducting non-profit businesses in particular sectors.
During the global financial crisis (GFC), as the interbank market dried up in autumn 2008, and banks could no
longer rely on borrowing from each other, the ECB amended its approach and provided unlimited credit to banks
at a fixed interest rate. The amended approach came to be known as fixed-rate full allotment.
Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows
of capital on the money supply.
Subnational issuers are actors under the authority of a national government such as state or local governments
that issue securities.
WHAT ARE THE RISKS?
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges. The value of investments can go down as well
as up, and investors may not get back the full amount invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest
rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income
securities falls. International investments are subject to special risks including currency fluctuations, social, economic and
political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and
currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable
for all investors.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government.
The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to
maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related invest-
ments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government
guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in
the market value of these securities.
10 March 2021IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. 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