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Welcome to Planet ZIRP: Start Rolling the Printing Presses

    Mar 6, 2009 @RGE Monitor

    ZIRP=Zero Interest Rate Policy

    Official interest rates of major central banks are already at zero or approaching zero, if not already there in inflation-adjusted terms. A zero interest rate policy (ZIRP) does not mean central banks have run out of ammo to fight deflation and recession. Central banks may use quantitative and/or qualitative easing to conduct monetary policy at zero or low interest rates:

  • Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities (base money), holding constant the composition of its assets (Buiter). Central banks could lend money in higher volumes directly to economic participants, as the Fed is doing in the commercial paper market (CIBC)
  • Credit easing is a variant of quantitative easing in which the central bank increases the size of its balance sheet through an increase in its monetary assets
  • Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet and the official policy rate and the rest of the list of usual suspects (Buiter). Central banks could move out the curve, buying longer-dated securities and forcing their rates down to zero (CIBC)
  • ZIRP or Near-ZIRP Countries: SNB and Fed moved the bottom of their target band for interest rates to 0%. BoJ is almost at ZIRP with its 0.1% interest rate. ECB, BoE, BoC, Sweden, Korea and Taiwan may also reach ZIRP in 2009. All aforementioned countries are considering alternative monetary policy to continue trying to stimulate credit growth
  • Alternative Monetary Policy Already in Play:

  • Fed began credit easing in 2008 and may resort to QE in 2009
  • BoJ: In Feb 2009, Bank of Japan started buying corporate bonds maturing in less than a year
  • BoE: BoE began purchasing private sector debt in Feb 2009 and will begin QE in March by buying up gilts
  • ECB has been expandings its balance sheet with unlimited cash auctions

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