Business Maverick

Business Maverick

Policy Makers Intensify Response to Virus Amid Recession Fears

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, Sept. 18, 2019. Federal Reserve policy makers lowered their main interest rate for a second time this year while splitting over the need for further easing, caught between uncertainty over trade and global growth and a domestic economy that's holding up well. Photographer: Andrew Harrer/Bloomberg

Global policy makers sought to reassure markets that they are ready to respond to the outbreak of the coronavirus as fears mount that its spread risks propelling the world economy toward recession.

Central bankers in the U.K. and Japan pledged to act as necessary to ensure stable financial markets, while the leaders of the International Monetary Fund and World Bank said they stood ready to help member nations. Group of Seven finance ministers and monetary officials will speak by teleconference on Tuesday, people familiar with the matter said.

The intensification of concern follows a warning from the OECD that the world economy now faces its “greatest danger” since the financial crisis more than a decade ago. With global growth already on course for its weakest pace since 2009, the group said a “longer lasting” outbreak could result in recession-like expansion of just 1.5% this year.

Weaker Growth

Days after Federal Reserve Chairman Jerome Powell opened the door to an interest rate cut this month, the prospect of central banks’ action sparked a rebound in stocks around the globe and sent U.S. equities toward their first gain in eight sessions.

In an emergency statement, Governor Haruhiko Kuroda said the Bank of Japan will “strive to provide ample liquidity and ensure stability in financial markets.” The Bank of England followed by saying it’s working with U.K. and international authorities to “ensure all necessary steps are taken to protect financial and monetary stability.”

Money markets now see the Fed lowering its rate by 50 basis points this month, and give a greater than 90% chance the European Central Bank will pare its rate by 10 basis points. They are pricing in a 25 basis-point reduction from the BOE this month too.

Economists at Goldman Sachs Group Inc. predict the Fed will ultimately slash by 100 basis points in the first half of the year. There is even speculation that the U.S. central bank will move before its policy makers gather on March 17-18, and some economists see the potential for an internationally coordinated cut for the first time since 2008.

“Global central bankers are intensely focused on the downside risks,” Goldman economists led by Jan Hatzius said in a report on Sunday. “We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move.”

Investors increasingly bet the central banks of Australia, Canada and Malaysia will ease at meetings already scheduled for this week.

With interest rates already low, governments may need to do more to support demand. Economists at Morgan Stanley forecast the combined fiscal deficit of the four largest advanced economies plus China will now run to at least 4.7% of global gross domestic product this year, the biggest since 2011.

Italy is already seeking to widen its budget deficit to pay for at least 3.6 billion euros ($4 billion) in proposed emergency economic measures.

Just a week ago, key central bankers were saying it was too soon to respond to the outbreak, a reticence to act that may also reflect their reluctance to be seen as racing to rescue investors. The subsequent plunge in global stocks forced a change in stance.

“Central banks will almost certainly all induce one form of easing or another, “ said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore.

Downgrades Galore

The Bank of Japan backed up Monday’s promise to help markets by offering to buy 500 billion yen ($4.6 billion) of government bonds to provide liquidity. Indonesia’s central bank lowered the amount lenders need to keep on reserve to shore up liquidity in its markets.

By not alluding to monetary policy as Powell did, Japan’s statement revealed the constraints the BOJ and many other central banks are under. Japan’s key rate is already minus 0.1% compared to the Fed’s 1.5% to 1.75% range.

The ECB, which hasn’t so far published a statement, is also limited by a deposit rate of minus 0.5%. Policy makers are reluctant to reduce it further given concern that banks, who are already seeing profit margins squeezed by negative rates, might pull back on lending.

On Monday, Vice President Luis De Guindos signaled that’s still the prevailing sentiment.

“The main front line of response has to be fiscal policy,” he said at a conference in London. “When you have a problem you can’t always look at central banks. We are not almighty.”

What Bloomberg’s Economists Say…

“The coronavirus threatens to plunge China’s economy into contraction, sending shock waves around the world. Bloomberg Economics is downgrading its forecast for growth, and anticipates larger spillovers to the region and other major economies.”

–Chang Shu, David Qu and Tom Orlik

Click here for full report

Even before the latest crisis, economists were questioning the benefits of ultra-loose monetary policies, given more than 700 interest-rate cuts and several rounds of bond-buying since the financial crisis. They boosted asset prices, but failed to generate substantial rebounds in economic growth.

For central bankers, the new challenge is that easier policy may be even less effective to combat the economic pain posed by a health emergency.

That’s because by shutting workplaces in China and increasingly abroad, the virus is dealing a blow to the world’s capacity to produce goods. Lower rates won’t help manufacturers whose factories are closed or which lack materials to make their own products. On the demand-side, they would likely also fail to spur consumers to shop or travel if they’re worried about infection.

But easier monetary policies should counter tighter financial conditions, support markets and maintain the supply of credit, thus helping to drive a rebound in demand once the virus is under control. Weak inflation also gives most central banks scope to act.

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“Rate cuts are not the silver bullet, although they can support markets somewhat,” said Jerome Jean Haegeli, chief economist at the Swiss Re Institute in Zurich.


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