Pandemic purchases averted ‘destabilising loop’, BIS finds

Central banks’ asset purchases during the Covid-19 pandemic helped avert a “destabilising loop of downward price spirals and fire sales”, a Bank for International Settlements report finds.

The report by the BIS’s Committee on the Global Financial System (CGFS) explores the motivations, transmission channels and design of different asset purchase programmes.

Central banks that used asset purchases (APs) tended to be successful in restoring monetary transmission, improving liquidity conditions and easing monetary conditions, the report finds.

The report also concludes side effects from the purchases “were not a significant concern” during the period of the crisis. It says most programmes were short-lived, which helped curtail unintended consequences.

Countries that made purchases over a longer period “were more likely to compound the side effects of earlier purchases, but none of the side effects compromised the overall effectiveness of APs”.

The CGFS working group, chaired by Margarita Delgado of the Bank of Spain and Toni Gravelle of the Bank of Canada, focused on the monetary policy impact of APs. A separate review by the Markets Committee in 2022 explored financial stability implications.

The CGFS report highlights major differences in how advanced economies and emerging market economies designed purchase programmes. Purchases in advanced economies tended to be bigger as a share of GDP, and public sector assets comprised a larger proportion of purchases. Central banks in emerging market economies were more likely to buy “other” assets, including foreign exchange and gold (see graph).

Many EMEs used large-scale asset purchases in new ways during the Covid crisis, primarily to restore order in markets and “cushion” the tightening of financial conditions. “In Brazil, India and Mexico, interventions in domestic government bond markets aimed to reduce excess volatility in various market rates and to contain risk premia,” the report says.

Central banks in Hungary, South Korea, India, Malaysia and Turkey already had asset purchases as part of their monetary toolkit, but used them “more intensively” during Covid.

Some, such as Indonesia, explicitly co-ordinated purchases with the government. Bank Indonesia bought government bonds in the primary market, which led some analysts to raise concerns over the central bank’s independence at the time. A law change has since given BI an explicit power to finance the government during periods of crisis.

In advanced economies, purchases tended to be launched at first with the aim of restoring market functioning during the “dash for cash” in March 2020. However, many of those central banks whose policy rates hit the effective lower bound during Covid later switched the goal of APs to delivering monetary easing.

The CGFS report notes market function and easing objectives “can be complementary”, especially where the central bank buys government bonds. “Yet, central banks sometimes shifted the purpose of their APs without explicitly stating that they were doing so,” it says.

The report says this blurring of objectives can influence market participants’ perceptions about their intended purpose. “Managing such perceptions is especially challenging when APs are used to counter market dysfunction at a time when monetary policy is being tightened,” it says.

The Bank of England faced this issue when it used temporary bond purchases to tackle the UK’s gilt market crisis in September and October 2022. Officials had to work hard to convince market participants that the operation was not quantitative easing.

“The governance, design and communication of interventions can help to demarcate one type of AP from the other,” the CGFS says.