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PRINT EDITION
Central banks and their unconventional tool kits
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By BRIAN MILNER
  
  

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Saturday, October 8, 2016 – Page B7

U.S. Federal Reserve Board

The Fed has been a staunch advocate of unconventional measures since turning to aggressive quantitative easing and other tools to stave off a second coming of the Great Depression in 2008-09. The Fed chief at the time, Ben Bernanke, vowed not to repeat those errors. Today, a weakerthan-expected U.S. recovery coupled with risks ranging from China's slowdown to a sluggish global economy to Brexit have kept U.S. interest rates close to zero. But even the policy doves, led by current Fed chair Janet Yellen, worry about the risks of keeping policy loose for so long. A tightening looms just around the corner.

Bank of Japan

Japan's central bank has long been the world's testing lab for monetary experiments when conventional interestrate manipulation doesn't work. With rates effectively at zero, the BoJ has unleashed quantitative easing on an unmatched scale since 2013 in an unsuccessful effort to ignite some inflation and get businesses and consumers to spend again. The bank's holdings of long-term government bonds have ballooned and now equal more than 70 per cent of GDP. Governor Haruhiko Kuroda shocked markets last January when the bank adopted a negative deposit rate of 0.1 per cent for the first time. Now, facing opposition from politicians, bankers and some of its own policy makers to deeper rate cuts, the bank is focused on steepening the yield curve by shifting its asset purchases to shorter-term debt in an effort to boost long-term bond yields and aid battered insurers and other financial institutions.

European Central Bank

The ECB's purpose in life has always been about fighting inflation, which caused it to react too slowly to the financial and economic crises that left Greece in ruins and devastated Spain and several smaller economies. But the bank has been making up for lost time since chief Mario Draghi famously vowed in 2012 to do "whatever it takes" to safeguard the euro. He wasn't making an empty promise, slashing rates to zero, deploying mechanisms to limit the financial-sector fallout from the Greek collapse and finally persuading reluctant board members to embrace aggressive quantitative easing to fend off deflation and stimulate the troubled euro-zone economy. Going beyond its narrow mandate, the ECB became the first major central bank to join the negative-rate club in mid-2014, when it cut its key deposit rate to minus 0.4 per cent, following the trail blazed by the Danish National Bank.

Swedish National Bank

Policy makers at the world's oldest central bank surprised the markets by moving into negative territory in early 2015. It wasn't a deep dive - the new rate was minus 0.1 per cent - and an accompanying round of quantitative easing was relatively small. But the message was clear. A bank that was so worried about inflation it mistakenly raised rates in 2011 was now signalling that the threat of deflation was too dangerous to ignore. So the bank opted to ease policy even though the economy was growing at a decent clip and household credit was expanding strongly.

Bank of England

The venerable bank was accused of not adopting strong enough stimulus steps to combat the ill winds unleashed by the 2008 crisis. The bank unveiled a package of unconventional measures in August to guard against recession and other financial risks posed by Britain's plunge toward Brexit. These included a rate cut to a record-low 0.25 per cent - the first reduction since March, 2009 - an extension of the QE program and extra funds for commercial banks to absorb shocks. More stimulus will follow if economic conditions deteriorate further in the months ahead.


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