Monetary policy: “Price manager” and “Lender of last resort”
2023-03-27
■ Major central banks in Europe and the United States have continued to raise interest rates to curb inflation, while also announcing emergency liquidity support
■ In the future, it is necessary to play the role of "price administrator" and "lender of last resort", and policy interest rate adjustment will become more complex
Since last week, monetary policy meetings have been held in the euro area, the United States, Switzerland, and the United Kingdom, all of which have decided to continue raising interest rates to stabilize prices, in line with policies before the financial crisis spread in early March. At the same time, the bank said that in the face of tight financial markets, it is ready to provide liquidity support when needed. Future monetary policy needs to address the issues of price stability and financial system stability, and the future direction of monetary policy is extremely difficult to predict.
The fundamental reason for the bankruptcy of American banks, which has triggered the current financial turmoil, lies in the lack of risk management in individual companies, namely, inconsistent asset liability management (ALM). However, not all banks that have been in financial trouble since then have the same problem. Depository institutions that rely on short-term capital acquisition (deposits, etc.) and long-term capital management (loans, securities investments, etc.) profit margins as their main sources of income have varying degrees of asset liability maturity, which can be said to be inherently inconsistent in their structure. This is precisely why the credit creation function of the financial system functions. Once a run occurs, it is inevitable that similar situations may be faced regardless of the risk management system and capital adequacy ratio.
In response to this situation, the United States and the European Central Bank have indicated their policies of providing support for emergency liquidity supplies as "lenders of last resort". The background of the response is that the current instability of the financial system is mainly due to liquidity issues. In the future, if there are growing concerns about solvency, public intervention such as asset evaluation, capital injection, and nationalization will be required. However, at present, except for some financial institutions, it can be seen that the severity of the problem has not yet reached that stage.
On the other hand, as a "price watchman", its policy of stabilizing prices by adjusting policy interest rates has not changed, and it continues to advocate the need to address high inflation through monetary tightening. Continued interest rate hikes are expected to further expand the reversed negative range of long-term and short-term interest rate differentials. As the profitability of financial institutions deteriorates with the deepening of the reversal of long-term and short-term interest rates, tightening credit attitudes through financial institutions is also the main reason for the deterioration of credit creation functions and the instability of the financial system. As before, it is difficult to adjust policy interest rates based solely on price and labor