Nomura

Unconventional monetary policy: Who’s next?

  • A decade on from the Great Recession, UMP is becoming more conventional.
  • Our analysis shows that the central banks most likely to move next to UMP are those in Israel, US, Thailand, UK, South Korea and Australia.
  • We show evidence that the negative side effects of UMP are building for most central banks that have already gone down this path.

The 2008-09 Great Recession forced the world’s major central banks to aggressively cut interest rates and implement unconventional monetary policies (UMP). Ten years later, UMP appears to be becoming more conventional. With the ongoing global growth slowdown, central banks in many smaller economies yet to go down the UMP path have also been lowering their policy rates and many are running short of traditional ammunition, bringing UMP into closer view. This raises the question: who could be next?

A scorecard methodology has been used to answer this question. This is based on 14 indicators for 19 countries whose central banks currently have 25-245 basis points of space left to cut policy interest rates. By identifying countries that have experienced underwhelming macroeconomic performances and are running low on traditional monetary and fiscal policy space, we assess potential contenders. The next step is to gauge how suitable UMPs might be in these 19 countries, by considering a number of different factors, including their susceptibility to negative side effects and their overall financial stability risks.

Based on all the above considerations, the scorecard suggests the central banks of Israel, US, Thailand, UK, South Korea and Australia are most likely to move to UMPs.

There is ample evidence to suggest UMPs have played a crucial role in reviving financial markets and helping economies emerge from the Great Recession, as well as helping to keep global financial conditions loose, supporting economic growth. However, this is far from saying that there are no downside risks. Central banks whose policy interest rates are approaching zero and may be contemplating whether to venture into UMPs need to be well aware of the negative side effects that can build up over time.

For more details on the positive and negative effects of UMPs and the assessment of the individual countries, read our full report here.

Contributors

  • Rob Subbaraman

    Head of Global Macro Research and Co-head of Global Markets Research

  • Andrew Ticehurst

    Rates Strategist, Australia

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