Central banks’ response to Covid-19 in advanced economies by Paolo Cavallino and Fiorella De Fiore published by BIS (6/2020).
“The outbreak of Covid-19 was a shock of unprecedented size and nature. Lockdowns and containment measures on a global scale led to a generalised sudden stop in economic activity. Workers’ reduced income – particularly for precarious workers – exacerbated the fall in demand induced by distancing measures and contributed to an increase in the risk of delinquency on mortgages and consumer loans. Businesses suffered from collapsing productive activities and reduced cash flow, which was particularly acute in sectors such as automotive, retail and travel. Concerns about household and corporate liquidity, combined with heightened uncertainty, hampered the functioning of key financial market segments.
In March 2020, corporate spreads surged globally for high-yield as well as investment grade issuers. The markets for asset-backed and mortgage-backed securities froze in many countries. Commercial paper markets experienced strain in the United States, Canada and the euro area due to enhanced rollover risk. Equity markets came under stress, and implied volatilities jumped for a wide range of assets. The global dash-for-cash disrupted fixed income asset markets. The US Treasury market experienced a sharp sell-off leading to spikes in long-term yields (Schrimpf, Shin and Sushko (2020)). Pressures arose in the Japanese government bond (JGB) market, and sovereign spreads widened substantially in the euro area.
Central banks responded promptly and forcefully, consistent with their mandates, to preserve smooth market functioning and an effective transmission of monetary policy. This Bulletin reviews the response of the central banks of the United States, the euro area, Japan, the United Kingdom and Canada.
A swift and forceful reaction
The overriding goal of central banks was to cushion the inevitable drop in economic activity by ensuring a smooth functioning of the financial system and facilitating the flow of credit to households and firms. In doing so, central banks performed their traditional crisis role as lenders of last resort to the financial sector. They extended it further to become providers of liquidity to the private non-financial sector.
Between March and April 2020, the five central banks under review deployed the full set of crisis management policies at their disposal (Table 1). They all offered new lending operations, and either extended or inaugurated asset purchase programmes. The Federal Reserve, the Bank of Canada and the Bank of England also cut interest rates. In addition, the Federal Reserve and, on a lesser scale, the ECB and the Bank of Japan increased the availability of their currencies abroad through swap lines…”
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