Central bank market neutrality is a myth!

CBs take non-neutral decisions all the time. They cannot avoid their scrutiny and discussion, especially where there is market failure like, e.g., for climate risks

Thread summing-up new blog with @SenniChiara https://www.cepweb.org/central-bank-market-neutrality-is-a-myth/">https://www.cepweb.org/central-b...

CBs invoke market neutrality as a core principle of monetary policy implementation. Neutrality aims to limit introducing distortions on financial markets, and interfering with market price discovery mechanisms

However, many CBs interventions breach this principle

CBs interventions are conceptually at odds with market neutrality.

CBs intervene to change market outcomes in many dimensions (short-term interest rate, entire yield curve, liquidity constraints, exchange rates, ...)

The point of CBs interventions is, well, to intervene.

A non-exhaustive list of non-neutral choices by CBs in their operations:

1) refinancing operations vs asset purchases (latter only benefit large corporations and exclude most SMEs
2) private vs public sector purchases
3) allocation across countries in sovereign bonds purchases

4) asset classes for private sector purchases (bonds, asset-backed securities, covered bonds, equities, real estate, ...)
5) credit risk (usually CBs only accept investment grade in their operations)
6) benchmark equity index (e.g. large vs. small caps)

CBs choices are often absolutely valid. Yet, they should be subject to scrutiny. Voices from across society should be heard in this debate.

This is particularly relevant when market fails, like in the case of climate risks (as highlighted by @ecb @lagarde and @Isabel_Schnabel)