Monetary Policy: Changes in Policy Positions After Banking Crisis
2023-04-24
■ With the easing of financial market tensions, European and American central banks will continue to raise interest rates in May to cope with inflation
■ However, as the side effects of rapid interest rate hikes have become apparent, the future can only gradually increase interest rates
From this weekend to next Sunday, monetary policy meetings will be held in the United States and Europe. From the statements of the US, Europe, and Bank of China, it can be seen that they are shifting their policy focus to anti-inflation measures, provided that the financial system is stabilized.
The Federal Reserve has launched a series of measures, including the Bank Term Financing Program (BTFP) and the expansion of US dollar financing through US dollar swaps among the six major central banks in Japan, the United States, and Europe, which have increased the supply of funds. While expanding the balance sheet, has greatly promoted the regression of financial system instability. BTFP was launched in the United States to provide emergency liquidity supply to the banking system while ensuring the face value of collateral assets, despite a time limit until March 2024. It is positioned as an institutional response to the side effects of rapid monetary tightening, such as the sharp outflow of deposits and the impairment of the value of bonds held due to rising interest rates. During the introduction period, when similar problems occur again, it is expected to become a buffer material for instability.
As of March, the FRB and the European Central Bank (ECB) acknowledged high uncertainty in the future and avoided making clear policy decisions after May. The subsequent easing of financial market tensions gave central banks more room to manage inflation and eliminated obstacles to further interest rate hikes. On a global scale, the surge in energy and commodity prices has come to an end, and although the rate of price increases as inflation targets has peaked in both the United States and the eurozone, high inflation continues. In addition, although the growth rate has slowed down, it still recorded an average annual growth rate of over 2%, indicating that from the perspective of suppressing inflation, monetary policy still needs to be further tightened. Especially in the euro area, the core consumer price index excluding food, energy, alcohol, and tobacco continued to accelerate year-on-year growth.
However, the financial instability in March showed that the excessive interest rate increase had a negative impact on the robustness of the financial system. The decisions that future monetary policy needs to make should not only consider price stability but also financial stability. It is expected that even considering the "higher and longer-term" strategies of central banks around the world, avoiding the recurrence of financial turmoil will help maximize the cumulative tightening effect in the medium term.