The European Central Bank’s bumper offer of more than a trillion euros in three-year loans has done much to soothe market jitters. So much, in fact, that talk is now turning to how central banks can remove some of the extraordinary support they have provided to the financial sector.
Yesterday it emerged that the ECB may not complete its €40bn covered bond purchase programme, launched at the height of the crisis in November. Further three-year longer-term refinancing operations, at present, are unlikely.
It is still far too early to see a more widespread withdrawal of central bank support. But it makes sense for central banks to do as much planning as possible for making an exit.
When the time comes to tighten, central banks are not short of options on how to do it. A raft of instruments are available to raise the cost of credit. Among them are interest on reserves, hiking reserve requirements, limits on the amount of liquidity offered through their auctions of central bank money, standard interest rate hikes and – in the ECB’s case at least – the issuance of central bank bills.
But what they do lack is experience of making an exit when the policy stimulus has been so large. A paper published last night by Citi, however, says there are a few lessons that can be taken from the Bank of Japan’s attempts to wean its banks off QE. Read more