Posted By: Tsu-Han (Ina) Chang
By: Oxford Analytica
Central banks must address impaired loans and promote liquidity to kick-start their economies.
As central banks head toward the lower limit of interest rate cuts, the search has begun for alternative or unconventional monetary policy instruments.
As central banks head toward the lower limit of interest rate cuts, the search has begun for alternative or unconventional monetary policy instruments.
Several options remain:
Interest rate spreads. Owing to risk aversion and information asymmetries regarding bank balance sheets, the difference between policy base rates and three-month interbank rates rose in October to about 1.5 percentage points (pp) in the euro-area and U.K. Thanks to liquidity operations, the gap shrank in January below 0.5 pp in the euro-area and to about 0.8 pp in the U.K. Continued liquidity provisions on the interbank market is a policy option left to central banks to reduce risk premiums on interbank rates and eventually on retail rates. It will probably remain a key policy instrument in the coming months to ensure the smooth day-to-day refinancing of the financial sector.
Interest rate spreads. Owing to risk aversion and information asymmetries regarding bank balance sheets, the difference between policy base rates and three-month interbank rates rose in October to about 1.5 percentage points (pp) in the euro-area and U.K. Thanks to liquidity operations, the gap shrank in January below 0.5 pp in the euro-area and to about 0.8 pp in the U.K. Continued liquidity provisions on the interbank market is a policy option left to central banks to reduce risk premiums on interbank rates and eventually on retail rates. It will probably remain a key policy instrument in the coming months to ensure the smooth day-to-day refinancing of the financial sector.
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