The end of expansionary monetary policy era

Today the Bank of England sends a strong signal on rate rise, and earlier this month, the chairman of the European Central Bank also made an announcement of possible end of the asset purchasing program. The US Federal Reserve has already increased its rates several times. The world economy seems to enter the era of the end of expansionary monetary policies.

The end of expansionary monetary policies is caused by several reasons. Firstly, the central bank believes there is high inflationary pressure in the economy, stopping expansionary monetary policy can lower the inflationary pressure in the economy. Secondly, when the central bank believes that there are too many bubbles in the economy. One of the functions of the central bank is to stabilize the economy. Usually the economic growth is too strong ,it may imply when the recession hits the economy, its damage could be more harmful. Therefore, the central bank tends to stabilise the economy and maintain the growing trend but reduce the volatility in the economy. Thirdly, when the central bank feels continuing expansionary monetary policies ineffectively improve the economic performance, the central bank could stop its expansionary monetary policies in order to improve the efficiency of the use of resources. Fourthly, when the central bank feels satisfied about the improvement made by the expansionary monetary policies, they will stop the expansionary policies and leave the economy to the market without any further intervention.

The possible end of the ECB and the BoE's monetary policies may be caused by the central banks feel continuing expansionary policies will not further improve the economic performances. The economic growth rates of Britain and the Eurozone are still relatively low. Though the inflation rates tend to rise, the rates are not yet rising far above 2.0%, which is usually the target set by the central banks. Therefore, the decision of stopping expansionary monetary policies is made based on they want to prevent inflation or strong volatility in the economies.

Once the Bank of England and the European Central Bank finally stop their expansionary monetary policies and start to rise rates, it may immediately cause a shock in the financial markets in Europe. The costs of borrowing in Britain and the Eurozone will increase and some companies may find themselves seeking financing becomes more costly and difficult. The economic performances may become weakened. However, it may reduce the increasing bubbles in the economies and give more room to the central banks when they are dealing with the recession in the future.