Central banker jargon: a decryption key

us federal reserve, banks, digital key, decryption key, taper tantrum

Central bankers are famous for their impenetrable jargon and panoply of acronyms thicker than alphabet soup.

With the US Federal Reserve and other central banks holding meetings this week, here is an explainer for several of the terms currently being bandied about:

‘Tapering’

This is the word of the moment, as investors want to know when central banks will begin to “taper”, or gradually reduce their massive stimulus to the pandemic-hit economy.

Central bankers want to avoid another “taper tantrum”, as happened in 2013, when investors panicked after the US Federal Reserve signalled it was going to taper the stimulus it introduced in the wake of the global financial crisis.

That tantrum saw interest rates spike, which was exactly the outcome Fed policymakers had hoped to avoid by gradually reducing the stimulus.

QE (and QT)

QE stands for Quantitative Easing, which is when central banks make access to financing easier for firms by increasing the amount of money available rather than lowering interest rates (which is qualitative easing).

They have done this by buying up bonds on the market, which pushes or holds down interest rates. The investors who had been holding bonds then have cash in their hands which they could loan to other companies or invest in their capital.

This has been the primary mechanism for central banks to provide stimulus for markets since the 2007-2008 global financial crisis.

More recently the abbreviation QT for Quantitative Tightening has been making the rounds. The tapering of bond purchases is Quantitative Tightening.

PEPP and APP

The Pandemic Emergency Purchase Programme (PEPP) is the QE scheme that the European Central Bank adopted in March 2020 to avoid the Covid-19 pandemic making it difficult for firms to borrow and interest rates shooting higher.

The programme, worth a total of 1.85 trillion euros, is supposed to wrap up in March 2022, but the ECB is likely to say more about its future in December.

The PEPP is in addition to the Asset Purchase Programme (APP), which has been in place since 2015 to help eurozone economies recover from a debt crisis that threatened to undermine the single currency bloc.

Worth 20 billion euros per month, it doesn’t have a set end-date, but is supposed to be wrapped up “shortly before” the ECB begins lifting interest rates from their record low levels, with the key rate at zero.

One of the major differences is that the ECB can buy Greek government bonds under the PEPP, but not the APP.

‘Accommodative’ monetary policy

An “accommodative” monetary policy, also known as an easy money policy, is when a central bank tries to goose growth in the economy by making borrowing easy.

It can do this is by lowering interest rates, a qualitative easing of borrowing conditions. It can also do quantitative easing by purchasing bonds.

Central banks can also take measures to help banks make more loans, such as the ECB’s TLTRO programme, where it provided banks with long-term loans at low or even no interest if they quickly lent on all of the money.

Negative interest rates

Yes, interest rates can go negative. Yes, that means borrowers are getting paid. And yes, it has happened.

While previously considered impossible, the financial crisis of this century has seen investors stampede to safe assets.

They drove the interest rates on the government bonds of certain countries, Germany in particular, into negative territory.

Investors were so afraid that value of money would fall that they were willing to pay countries like Germany to hold their money.

The ECB also pushed its deposit rate to negative 0.5 percent.

This is the rate on commercial bank deposits with the ECB. It meant commercial banks had to pay the ECB to hold onto their money and this was done by the ECB to push the banks to lend instead of holding onto cash.

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