Unconventional monetary policy
BY  |  

Why do central banks and governments pursue unconventional monetary policies?

There are plenty of lessons for other markets from Japan's experience with zero interest rates and quantitative easing (QE).

The uncertain economic outlook has prompted the Reserve Bank of Australia (RBA) to consider employing unconventional monetary policies to stimulate growth.

Should the central bank choose to go down this path, Australia would follow the lead of a number of other nations.

There is much local investors can learn from the overseas experience. This paper explores why countries choose to pursue unconventional monetary policies.

Interest rates are one of the most important factors that influence financial markets.

They impact the cost of borrowing and returns on many assets, including cash.

Combined with other elements, such as 10-year yields on government bonds, interest rates also provide insights into the health of the economy and inflation. This is vital information when constructing investment portfolios.

In response to an uncertain economic outlook, central banks from many of the major developed markets have kept interest rates at exceptionally low levels. In some countries, rates have even been negative. These are examples of unconventional monetary policies.

In recent history, Sweden was one of the first countries to explore unconventional monetary policies. Its central bank, the Riksbank, introduced negative rates in July 2009 by cutting its overnight deposit rate to -0.25%.

Then in June 2014, the European Central Bank (ECB) lowered its deposit rate to -0.10%. Other European countries and Japan have since implemented negative interest rates.

In 2019, the RBA discussed the use of unconventional policies such as negative interest rates or buying government bonds to effectively lower longer-term interest rates and generate activity.

While each situation is unique, there are many lessons that can be applied from these events to what is happening in financial markets today.

Link to something euZRAOJJ