Central Banks on QE Highway Worry About Running Out of Roadby
Sustainability key for central banks far from inflation goals
Quantitative-easing concerns include how to exit the programs
Two of the world’s most accommodative central banks are starting to think about ways out of the bond-buying maze.
Long after their U.S. counterpart ended asset purchases and started raising interest rates, the Bank of Japan and the European Central Bank continue to rely on massive quantitative easing in a battle to revive consumer-price growth.
But what worked once won’t necessarily work forever. The glow of QE is fading amid negative side effects including financial-stability concerns and reduced earnings for commercial lenders, and especially the simple difficulty of finding sufficient suitable assets to acquire.
The BOJ has shifted its policy framework to keep it sustainable, while ECB staff have been told to work out how to adjust the rules of QE so it can be kept active as long as needed. Both central banks are far from their inflation goals, meaning their programs should ideally be ready for a long haul, yet signs are mounting that policy makers know there is only so far they can go.
“QE, as we know it, is running out of runway,” said Frederick Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “It turns out there aren’t an infinite number of bonds to buy. And investors are increasingly reluctant to surrender to the central bank those still left in the market.”
At the ECB, talk has turned to tapering as a way to end QE rather than a sudden stop. While that says nothing about the timing of such a move, and the topic has been kept off the Governing Council’s formal agendas so far, the fact that an informal consensus is building on an exit strategy reflects a waning appetite among some policy makers for ever-more bond-buying.
In Japan, where the central bank owns more than a third of outstanding government bonds, Governor Haruhiko Kuroda has switched his focus from increasing debt purchases to targeting yields across a range of maturities instead. While that move could be read as a form of tapering, few expect an end to the BOJ’s super-easy monetary policy any time soon.
"Everybody would like to find a way out of large-scale QE because it’s obvious that the economy can’t function like this forever,” Adam Glapinski, governor of the central bank in Poland, which is outside the euro area, told reporters on Wednesday. “But after a junkie gets hooked on various substances, he finds it hard to come clean and this can only happen gradually, in fits and starts."
The communication challenge for the ECB and BOJ is convincing nervous investors that they’re not withdrawing stimulus prematurely -- or at all. European stocks and bonds fell on the report of the ECB’s thinking on tapering, similar to the 2013 “taper tantrum” in the U.S. when the Federal Reserve signaled it was ready to reduce the pace of its purchases.
“‘Tapering doesn’t mean that monetary policy is going to be tightened,” said Klaus Baader, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, and former co-head of European economic research in London. “It’s just being loosened at a slower pace.”
Central banks claim that QE averted a deflationary spiral of falling prices and wages. Euro-area inflation was below zero from late 2014 until March 2015, when the ECB started buying sovereign debt. The rate is now 0.4 percent and likely to keep climbing -- though it won’t be back at the goal of just under 2 percent until at least the end of 2018, according to ECB projections. Japan’s record is more feeble, with a key measure of prices falling for six straight months through August.
“QE will remain a pillar of monetary policy,” said Richard Jerram, chief economist at Bank of Singapore Ltd.
Still, monetary officials would like governments to extend more of a helping hand with structural reforms and fiscal stimulus. ECB President Mario Draghi and his colleagues have been increasingly strident in their calls for other policy areas to play their part.
For some, like former U.S. Treasury Secretary Lawrence Summers, the QE tool kit is far from empty. In a speech in Tokyo last week, he suggested continuous purchases of stocks could bolster those economies struggling with tepid inflation and weak growth. Doing so would channel funds into riskier assets that investors are shying away from, Summers said.
Japan has “engaged in that type of transaction to much greater extent than other countries,” Summers said, pointing out among its initiatives the BOJ’s purchases of exchange-traded funds. “It is something that economic logic suggests should be considered in other places where the zero lower bound is a potentially important monetary-policy issue,” he said, referring to the perceived lower limit for benchmark rates set by central banks.
Still, the international climate isn’t providing much help. Rising political tensions over globalization threaten to derail trade pacts and an already fragile world recovery. While the global economy will expand 3.1 percent this year before accelerating to 3.4 percent next year, advanced economies will remain on a low-growth path, according to the International Monetary Fund.
And central banks, like the ECB and the BOJ, are getting less bang for their buck.
“As interest rates get lower and lower, the impact on the economy seems to diminish,” said Societe Generale’s Baader. “And what’s pretty clear is that the impact of increases in QE over time to has been declining.”