The U.S. Set to Join Unconventional-Policy Club, Nomura Says

(Bloomberg) -- The U.S. could help lead a new charge into unconventional policy as central banks with little ammunition delve into dangerous territory.

Among 19 economies with benchmark rates between 0% and 5%, seven of them are likely to turn to unconventional measures amid responses to the coronavirus outbreak, according to research by economists at Nomura Holdings Inc.

Israel, the U.S., Thailand, the U.K., South Korea, Australia and Taiwan were seen, in that order, as most likely to resort to such measures. These contenders were judged by the states of their economies and the relatively diminished space for additional conventional measures.

“A decade on from the Great Recession, unconventional monetary policy is becoming more conventional,” said the economists, led by Rob Subbaraman, Nomura’s global head of macro research. “With dwindling traditional ammunition, a number of smaller economies appear closer to following their larger-country counterparts” with those extraordinary measures.

Central banks and governments worldwide are under increasing pressure to act in response to the fast-spreading threats to economies from the virus, with borders shut off and large gatherings increasingly restricted. Governments have pledged more than $187 billion globally in stimulus amid calls for more as confirmed cases soar past 176,000 with more than 7,000 deaths.

The Nomura analysts assessed the 19 economies, all with non-negative policy rates, using 14 indicators including inflation, gross public debt, yield curve slope, banking sector returns on assets, and real property-price growth.

For the six economies studied that already are in negative interest rates, the unfavorable effects of unconventional monetary policies are apparent, according to the study. Financial stability risks, suffering of insurance and pension companies unable to match promised yield on long-term liabilities, greater wealth inequality, negative signaling that crushes confidence, and a blurring of central bank independence were among the side effects cited.

Among the key lessons learned, the Nomura analysts recommend to policy makers:

• Act before deflationary effects set in
• Use a more comprehensive package of measures to enhance effectiveness and reduce costs
• Large-scale asset purchases are effective during crisis, but lose firepower over time
• Each financial system has its own policy needs
• Forward guidance can be powerful but requires credibility
• Negative interest rates erode bank profitability
• In small, open economies, the exchange rate tool can be critical

To contact the reporter on this story: Michelle Jamrisko in Singapore at mjamrisko@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Malcolm Scott

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