What is left in the central bank toolbox

Cutting interest rates

A LONG and shallow recovery from the Great Recession has meant that interest rates still stand at record lows for many developed markets. From here, central banks have limited room to cut interest rates. The exception is the US, where the Federal Reserve has conducted a hiking cycle which, even then, has been cut short relative to expectations. In the previous downturn, central banks reached the lower bound of interest rates, which led them to turn to unconventional policy tools. To adequately support employment and inflation, it has been estimated using a Taylor rule that the Fed would have needed to cut rates to -5 per cent in 2009. At the detriment of bank profitability, some central banks, including the European Central Bank (ECB), and Bank of Japan (BoJ) have negative interest rates, charging commercial banks to keep deposits at the central bank. For these economies in particular, there is less scope to cut rates.

Restarting QE