Central banks have loosened policy but will it matter?

The central banks of the world have started to engage in another round of easing.

The Fed has continued Operation Twist until the end of the year. While this is supposed to sterilized, the net effect is to affect long-term interest rates and serve as QE3 lite.

The ECB ha decreased interest rates by 25 bps from 1 to 75 bps. They also surprised the market by lowering its deposit rate to zero. The ECB is almost out of options except for more QE activity like direct lending to banks. A trillion in 3-year loans to banks has had limited effect if there is not demand for funds, so the impact of its policies is unclear.

The BOC cut the one year lending rate to 6% and the deposit rate to 3 percent. The lending rate was cut by 31 bps and the deposit rate declined by 25 bps. This is the second action in a matter of weeks. By lowering the lending rate more than the deposit rate, it is trying to provide more funds for banks from savings and then have the funds used for loans. Their last action offered more flexibility in the rate activity for banks which has increased competition. The effect will be more loan activity, but less profitability by banks. For the Chinese, profitability is not a concern, loan growth is the issue.

The Bank of England has increased the QE program by allowing for the purchase of another 50 billion in sterling assets. This will make the size of quantitative easing 375 billion sterling since 2008. This is the third round of quantitative easing and is supposed to offset what looks like a double dip recession. This impact on exchange rates has seen strong but outside of London the policies have been hard pressed to change the poor growth direction.

The Danish central bank has moved its deposit rate to negative .2 percent. That is right; the central bank wants to be having a negative time value of money.

What is notable is that each round of easing is having less effect on the real economy.