Pandemic was tough on world, but tougher on banks. And the effects are to last for long.
- Central banks played the role of saviour during pandemic, buying back bonds worth trillion dollars.
- U.S. Fed alone bought bonds worth $4 trillion during the period
- Many central banks including Fed, ECB, BOJ, etc. expected to continue with their stimulus policies.
- The overall, solid recovery of the global economy from the COVID-19 led pandemic yet to take time.
Stock Market News, Wall Street: According to an analysis by strategists at Bank of America Corp, a total of $834 million has been spent every hour for the past 18 months by banks to prop up the global economy. This includes major central banks of the world like the Bank of Japan, the European Central Bank, Bank of Canada and even the U.S. Federal Reserve.
That is the amount that has been spent since the pandemic hit with estimates that the United States Federal Reserve, the central banker of the country, alone bought bonds worth $4 trillion during the period(1).
The statistic is mindboggling for most commoners but that is how central banks helped most large companies to stay afloat during the pandemic. With the news of such large sums of money flowing into the stock market, it is no wonder that markets around the world saw rallies even during the pandemic when most businesses were shut or were only partially operational.
The COVID-19 outbreak that started from Wuhan, China, crippled the global economy within a matter of months. The pandemic forced governments all around the world to go into extended periods of lockdowns, closing down borders, both internally and externally. Even though some of the strict pandemic-induced restrictions were relaxed as the outbreak started phasing out, some economies have not yet been able to come back to their pre-pandemic levels. That has in turn brought down the prospect of growth of the global economy.
Despite the massive vaccination drive, new variants of the COVID-19 virus continue to pose a grave threat to the economic infrastructure of the world. The sporadic spread of the Delta variant has again forced governments to impose restrictions such as in Japan and China, and the woes for the global economy continue.
Throughout these episodes of the economic fiasco, banks around the world, continued playing a major role in helping economies survive by pumping trillion dollars in stimulus and otherwise.
While there are signs of some rebound in the global economy which could mean more normal policies by central banks, most are unwilling to pull back on their emergency stimulus. Banks have continued with their expansive policies of buying bonds from the market in an effort to prop up the economy, and the list includes the Federal Reserve of the United States, European Central Bank, and Bank of Japan, among the other major institutions.
In addition to buying back trillion bonds, many of the most powerful central banks around the world also brought down interest rates to historic lows which reduced borrowing costs.
With money in trillions of dollars flowing into the market and with low-cost debt, there is currently more than $16 trillion in debt with a negative yield. That is partly the reason why asset managers say they have no alternatives but to keep purchasing stocks.
Pandemic Expenditure of Major Central Banks and their Interest Strategies
It is anticipated that the rates of interest will not be changed by major central banks till the end of 2021 while the bond purchase is also expected to continue, even though analysts and economists predict some could be forced to reconsider pumping in more money into the market as economies open up and inflation raises its head.
However, despite the reservations, most economists, market analysts, and stock market news observers predict that central banks would continue supporting the economy to guarantee the recovery of the global economy to pre-pandemic levels. This has been made somewhat urgent with recent major outbreaks of COVID-19, primarily caused by the Delta variant in multiple countries including the United States, China, and Japan.
“For advanced economies, continued virus uncertainty, deep labor market scars, and recognition that past decisions erred on the side of deflationary pre-emption will conspire to keep policy looser for longer. In many emerging markets, currency stress means central banks don’t have that luxury,” according to Tom Orlik, the chief economist at Bloomberg(2).
The U.S. Federal Reserve has pledged to continue with its policy of buying $120 billion of Treasuries and mortgage-backed bonds every month until “substantial further progress” on inflation and employment is evidenced. The Fed has so far provided no indication of any timeframe when it could slow bond buying. It has also signaled that it expects to keep rates near zero through 2023.
The European Central Bank (ECB) has said it would keep financing conditions for governments, companies, and households “favorable” till the pandemic crisis phase is over and would use its 1.85 trillion-euro ($2.2 trillion) Pandemic Emergency Purchase Program to keep purchasing bonds and keeping bond yields low. It would also maintain interest rates at historic lows to provide ultra-cheap loans to banks.
The Bank of Japan has set up its stimulus framework for the longer term and it is expected that the central banker could ease up its bond and ETF buying strategy that it had first implemented during the pandemic. The Bank of England on the other hand is widely expected to adopt negative interest rates in the third quarter, which will depend on the extent to which inflation rises and whether the UK economy is able to stage a strong rebound from the pandemic hit as has been predicted.
However, the Bank of Canada has provided signals about it being the first Group of Seven central banks to start easing its monetary policy support because of the economic recovery of the country from the COVID-19 crisis.
Last year, the People’s Bank of China, the central bank of the second-largest economy of the world, had cut lending rates and implemented multiple quantitative tools to flush the economy with money last year when the pandemic hit the economy. The central bank is currently contemplating reigning in its pandemic era stimulus – including bond purchasing since the recovery of the Chinese economy is well on track.
There are, however, six central banks, mostly from the emerging economies, still predicted to hike interest rates because of inflationary pressures. This includes Brazil, Russia, and Nigeria, while Turkey is expected to further reduce interest rates to assist in economic recovery.
“For advanced economies, continued virus uncertainty, deep labor market scars, and recognition that past decisions erred on the side of deflationary pre-emption will conspire to keep policy looser for longer. In many emerging markets, currency stress means central banks don’t have that luxury,” said Tom Orlik.
Despite the major central banks like the Bank of Japan and the European Central Bank continuing with their bond-buying and other monetary policies to support their economies, the question that investors are asking is how long the central banks be able to continue with their cash injections at full force. Many economists and stock market analysts do not expect this trend to continue for long and expect tapering down of bond and asset-buying by central banks sometime towards the end of the current year. And some in the emerging markets have already taken a step in that direction.