Oxford Analytica expects central banks to expand their quantititave easing activities to include riskier assets.
Excerpted from INTERNATIONAL: QE will move beyond ‘risk-free’ assets
A focus on risk-free assets has limited the effectiveness of QE in developed economies, but central banks will become more ambitious in their use of such programmes.
Among their options is purchasing securitised loans from the banking system, representing claims on both private non-financial businesses and households. Indeed, the US Federal Reserve has already done so by purchasing mortgage-backed securities.
Yet expanding central bank balance sheets through conventional purchases of domestic securities requires a political balancing act. Critics accuse central banks of ‘debasing’ the currency and argue that QE has little power actually to boost activity.
The problem is that, thus far, most QE has focused on buying risk-free bonds – ie, those of the government. Aside from directly reducing the interest rate on these — and thus the price of credit generally — this does little to increase the flow of credit, since banks are likely to treat their new central bank money equivalently to the bonds they had been holding.
To provide liquidity to the economy more broadly, central banks can take a more aggressive stance, by:
- purchasing private-sector securities directly in the open market;
- purchasing bundles of mortgages and/or business loans from the banking system;
- lending to an off-balance-sheet state investment fund for capital improvement projects; and
- acquiring securities of any type from the non-financial sector, including from quasi-governmental agencies.