Facing an unprecedented shock, central banks all around the world chose to implement a very accommodative monetary response to support growth and underpin financial stability. On the one hand, Emerging Market central banks mainly favored traditional policies to lower borrowing costs. According to Bloomberg data, they delivered more than 5 500 basis points of cuts since the beginning of 2019 (2 650 basis points since the end of February). Turkey alone accounted for almost a third of the total while countries including Brazil, India or Indonesia joined the move.
In the meantime, central banks in Advanced Economies, which had less room to cut rates significantly, mainly focused on unconventional policies by implementing special lending programs and massive asset purchases. As a result, central banks’ balance sheets have grown exponentially since the coranovirus crisis. According to my calculation, *G7 central banks’ combined balance sheet increased by ~$6.5 trillion since February 2020. The lion’s share (~$2.8 trillion) came from the U.S. Federal Reserve. As extraordinary as the size of the Fed purchases is the breadth of the global shift. The European Central Bank, Bank of Japan, Bank of England and — for the first time — Bank of Canada are now engaged in quantitative easing (QE).
Other central banks in Advanced Economies such as the Royal Bank of Australia and the Reserve Bank of New Zealand also stepped in with QE. On Wednesday, Bloomberg highlighted that “Australia’s central bank kept its interest rate and yield target unchanged, while announcing it will end a three-month hiatus in bond buying, as Victoria state’s tighter and longer lockdown adds to headwinds.”
In this context, a proxy constructed by Bloomberg showed that global money supply has skyrocketed since the virus hit the economy with a pace well above what we saw over the past ten years.
This trend can explain a large part of extreme moves we’re seeing in the financial markets especially for precious metal prices such as gold (see chart from Trackinsight below). But now, the real question is how can policymakers normalize monetary policy without risking a crash of financial assets?