We are quite happy to close the chapter on the first half of 2020. The first six months certainly didn't pan out the way anyone expected. At the beginning of the year, Christine Lagarde had just started her new job as the ECB President. While she described herself as not quite a dove or a hawk, but a wise owl, she morphed into a full-fledged dove with the onset of the pandemic. The ECB's plan to embark on a year-long overdue comprehensive Strategy Review was quickly shoved aside for a massive QE program. The BoE is still facing the possibility of a hard Brexit; but, it is also focused on damage control from the coronavirus. The Bank of Japan hasn't changed its communication. Although, these days, when Governor Kuroda says he will not hesitate to unleash more monetary stimulus if needed, he really means it. Most of the central banks' actions to protect their respective economies from being strangled by the effects of the virus have been done (mostly in March); now, all will wait and watch for the recovery to take hold. And, if necessary, more will be done.
The ECB was a bit slower to react to COVID-19 but it made up for it. Now, it is armed with a "temporary envelope" of €120 bln for asset purchases until the end of the year, a €1.35 trln Pandemic Emergency Purchase Program (PEPP), which will run until June 2021, and the earlier Public Sector Purchase Program (PSPP), which allows €20 bln per month for bond purchases for as long as necessary. Plus, there's a series of non-targeted pandemic emergency longer-term refinancing operations (PELTROS), other instruments (the targeted longer-term refinancing operations, or TLTRO), and a new precautionary backstop facility called the Eurosystem repo facility (EUREP). On top of the over €1.4 trln of assets that it can buy, there is the yet-to-pass €750 bln EU Recovery Fund. And a big source of relief came from the settling of the recent dispute between the German constitutional court and the ECB as it had the potential to cause massive damage. All in, unless the Euro Area economy takes another turn for the worse, there should be enough monetary and fiscal stimulus to guide Europe through the pandemic.
Andrew Bailey took over as head of the BoE in March, and threw his two pence into the decision to slash rates to a wafer-thin 0.1% and increase QE by £200 bln to £645 bln. Since then, the former regulator lifted QE again (to £745 bln), citing his concerns about a "significant weakening in the labour market". The broader economy shrank at its fastest pace in four decades in Q1, and Q2 promises to be far worse. However, with better data of late, Britain may avoid what the BoE had expected earlier this year .... the largest economic decline since the Great Frost of 1709. Still, the economy is just starting to recover from the COVID-19 shutdown, but it could easily get knocked down again if the EU/UK talks fail.
The usual dovishness prevails at the Bank of Japan but more so now, as the economy recovers from the lockdowns. (Note that Japan's lockdowns were lighter than other countries.) Although policymakers will "closely monitor" the effects of their policy actions, Governor Kuroda describes the economy as being in an "extremely severe situation". The latest round was an introduction of Japan's own version of the Fed's Main Street Lending program, called the "New Fund-Provisioning Measure to Support Financing Mainly of Small and Medium-Sized Firms". Although the name doesn't exactly roll off the tongue, it will see interest-free loans lent to these firms for up to a year. On top of this, the government rolled out a record amount of stimulus (¥234.2 trln, or 42% of GDP) to support growth. Time will tell if more is needed.