COVID-19 monetary policy: Fast easers to tighten first

• In this first paper in a series on the cross-country monetary aspects of the COVID- 19 related economic crisis, we look at how major central banks responded.

• Most central banks engaged in various balance sheet expanding operations, but the end effect on balance sheets varied greatly. Balance sheets increased the most in % terms in Canada, Australia, and New Zealand.

• The response also varied in the type of operations. E.g. Canada and Scandi central banks relied more heavily on TOMOs in the first months.

• Central banks that initially eased more are expected to start tightening sooner.

• In future papers, we plan to look at the role of public liquidity management and the lasting effect on central bank balance sheets.

Fast easers expected to tighten first

In this first paper in our series on the cross-country monetary aspects of the COVID-19 related economic crisis, we look at the responses of major central banks, which increased their balance sheets with large-scale open market operations and/or quantitative easing. Even though most central banks engaged in a combination of interest rate cuts and balance sheet increasing operations, the end effect varied greatly across countries.

We illustrate a key finding of our analysis in Chart 1: Central banks that were faster to expand their balance sheets in the first months of the crisis are expected by the market to increase interest rates first in the coming years, judging by the pricing in the OIS swap market (we use pricing this summer since some central banks have now started to hike policy rates). This involves central banks in Australia, Canada, New Zealand, and Norway. Below we analyze how major central banks conducted balance sheet increasing operations. 

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