Tuesday 14 June 2016 1:45 am

What will central banks do next? Prepare for more unconventional monetary policy, experts warn

Eight years since the global financial crisis, and central banks are still experimenting with ever-more unusual ways to fire up their economies.

“We have had QE money printing, QE involving corporate bonds, very cheap loans to banks, and in the US they have been buying up troubled assets,” explains Jim Leaviss of M&G Investments.

But despite these measures, growth in the global economy remains weak and earlier this year there was talk of a potential world recession.

Undeterred, last week the European Central Bank began a new QE programme of buying up corporate bonds in a fresh attempt to boost business confidence and stimulate economic activity in the region. But these unconventional measures are not without their critics.

“QE is fast becoming discredited. It is very tenuous that it has benefited the real economy,” says Jason Hollands of Tilney Bestinvest. Unusual policy on the whole is “dangerous because it takes us further and further into unchartered territory and continues to create unforeseen risks,” says Markus Stadlmann of Lloyds Banking Group.

Given that weak spots remain in the world economy, there’s likely to be more unusual policy coming – the impact of which will be unknown until it’s tried.

“We are on the verge of a new regime. We have exhausted all the possibilities of QE,” says Stadlmann.

He expects central banks to come out with new measures that haven’t been tried before, and they’ll be spearheaded by either the ECB or Bank of Japan, two of the most dogged in their attempts to create growth.

Here are some of the possible alternatives.


Central banks could hand out cheques to ordinary people in the hopes their spending would stimulate the economy. It’s called “helicopter money”, after the term was coined by famed economist Milton Friedman.

“Let us suppose now that one day a helicopter flies over [a] community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced this is a unique event which will never be repeated,” wrote Friedman.

Read more: Should we fear the coming of a cashless society?

He was discussing the impact of monetary policy on inflation and not actually proposing this as a measure, but it’s been increasingly mooted by other economists as a potential course of action. Japan tried this several times in the 1990s, when it gave families with children $200 shopping vouchers which had to be used in six months. It was considered moderately successful.

Helicopter money is also seen as an intelligent alternative to traditional QE.

The chief criticism of QE, is that the trillions authorities have printed and handed to banks through the purchase of bonds, has not found its way into the wider economy. Instead, it has raised the prices of financial assets – stocks, bonds – and only made the people who own them wealthier. “It has been one big mechanism for redistributing wealth to the wealthy,” says Hollands.

Read more: Debt threatens the global economy warns IMF

As exciting as it would be to receive a cheque in the post for £3,000, some experts question whether it would actually have a positive effect on the economy. “If people did receive cheques they would potentially save most of it,” Stadlmann explains. “The global financial crisis changed how we think about debt. Households in many countries are much better at managing their finances now, and if there is a one-off payment they would probably save rather than spend.”


Governments could embark on huge infrastructure building plans – the cost of which would be so large it would stimulate economic growth, alongside providing employment. “This is one of the measures that hasn’t really been tried [since the crisis] and which governments have been criticised for,” says M&G’s Leaviss.

He explains: “[Famous economist] John Maynard Keynes would say, at a time of insufficient demand in the economy, the state should come in and build infrastructure for society. That didn’t happen. There was a feeling among elected officials that austerity was needed.”

It’s possible this could be done in tandem with the central bank cancelling some of the government’s debt. This would free up public funds from debt payments and mean more available money for spending. “Governments wouldn’t save [the extra funds]. They would be in a much better position to spend on infrastructure, social security or education, which would contribute to societal well-being,” explains Stadlmann.


While the debate rages over when the US and UK will raise interest rates back to pre-crisis levels, rates have been cut in many countries around the world. Over 25 central banks, in markets as diverse as Canada and China, Australia and Turkey, Singapore and India, all turned to the economy-boosting measure in 2015.

Negative interest rates have also crept into Japan, the Eurozone, Switzerland, Denmark and Sweden.

Read more: Negative rates are a "dangerous experiment" with "insidious effects"

They mean people have to pay the bank to keep money on deposit, which is a disincentive to save and, in theory, will encourage spending. The banks too have to pay to deposit funds with the country’s central bank.

Although the theory is straightforward – effectively taxing savings should encourage spending – experts have warned of perverse consequences.

“Negative rates might make people hoard cash,” says Chris Iggo of Axa Investment Managers.

For this reason, Bank of England chief economist Andy Haldane said, if central banks want to impose significant negative rates on society, they would have to move fully to electronic money.

“No [country] has seriously proposed doing this because they know there would be a lot of resistance. But we are seeing changes that go some way towards this,” says Leaviss.


City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.