Some Central Banks Give Up Inflation Fight Amid Currency Crisis

(KNSI) – One central bank is now reversing course from tighter monetary policy, which could be a preview of interventions in the coming weeks.

The Bank of England announced early Wednesday it was buying gilts, the British equivalent of treasury bonds, to bring down borrowing costs in the country. The policy is known as quantitative easing, one of several emergency measures that have been developed to deal with financial crises in recent decades.

Dean of the School of Public Affairs at Saint Cloud State University King Banaian says he expects the Federal Reserve to use emergency tools as a backstop if foreign banks ask for relief as their respective bonds and currencies sell off.

“I think we would expect that they’ll get some help in terms of access to US dollars through currency swaps that will give them the ability to not necessarily stop the depreciation of those exchange rates, but at least slow their decline.”

Banaian says it is hard to deploy such measures at a time of high inflation.

If the U.S. Federal Reserve opens up the Discount Window to make liquidity available for stressed financial markets it will most likely do so in a targeted way to keep inflation in check. Sterilized lending refers to a policy that includes emergency financial measures without an expansion of the overall money supply. For every dollar that goes out the door to ease a liquidity crunch, it is taken away through tightening elsewhere. Banaian says it could have huge consequences for the housing market.

“The mortgage-backed securities that got bought up, those are not rolling off the balance sheet as the Fed had intended and the question is if they also have to sterilize those [emergency] loans, do they have to actually start trying to sell those mortgage-backed securities, and if so, what happens to mortgage rates?”

Pending home sales fell 2% in August, down by over 20% compared to last year. Surging mortgage rates have pushed potential buyers to the sideline. U.S. Treasury yields fell substantially Wednesday following the actions by the Bank of England.

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