Washington: Central banks stepped up their emergency efforts to calm financial markets and support their economies in a historic week of market losses as more of the world shuts down to contain the coronavirus outbreak.
Meeting into their nights, policymakers at the Federal Reserve launched a programme to support money market mutual funds, hours after those at the European Central Bank announced a 750 billion euro ($820 billion) bond-buying initiative.
The Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to 0.25 per cent Thursday and ventured into quantitative easing with plans to purchase government bonds. Japan and South Korea also boosted bond-buying.
Central bankers are scrambling to address liquidity shortages, financial stability risks and crushed growth prospects as borders are shuttered, whole cities go into lockdown and mass gatherings are increasingly banned to contain the virus. So far the policy action isn’t doing much to calm markets, with most stocks sliding in volatile trading on Thursday.
“Policymakers are now responding to clear signs of dislocation across financial markets more than the direct hit to the economy,” said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings in Singapore. The central bank moves are “off the charts of what anyone thought possible just a few weeks ago.”
The Philippine central bank cut its benchmark rate by a bigger-than-usual 50 basis points Thursday, while Indonesia and Taiwan followed with 25-point reductions each. South Africa is also expected to ease policy later in the day.
The Fed has already slashed interest rates in two emergency moves, triggering similar action across the globe from New Zealand to Canada.
Some of central bank bond programs announced on Wednesday and Thursday include:
— A bond-buying programme worth 750 billion euros ($818 billion) from the ECB. The temporary asset-purchase programme for public and private-sector securities will last at least through the end of this year.
— India’s central bank purchased Rs100 billion ($1.3 billion) in sovereign notes.
— The Bank of Japan conducted a series of unscheduled operations, buying billions of dollars worth of bonds.
— The Bank of Korea said it will buy 1.5 trillion won of three-, five- and 10-year bonds.
Reserve Bank of Australia Governor Philip Lowe said Thursday the financial market volatility has led to impaired government bond markets and authorities need to act.
“The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus,” he said.
In New Zealand, where an emergency rate cut isn’t being efficiently transmitted, the central bank is facing increasing pressure to accelerate plans for large-scale asset purchases.
With central banks quickly using up their available ammunition, governments are stepping up their action too, invoking wartime references as they shake off budgetary restraints. The global tally of fiscal support and bank guarantees stands at about $1.9 trillion already.
“Usually it is monetary easing that provides the initial line of defence in responding to an economic slowdown,” Bruce Kasman, chief economist at JPMorgan Securities, said in a research note. “The constraints facing central banks and the flexibility provided to fiscal authorities in an extremely low interest rate environment suggest that fiscal easing will be delivered earlier in this episode.”
All past forecasts amount to zilch
Many central bankers are signalling they’ll do even more as the prospect of a global recession becomes more certain. India’s central bank said it stands ready to take more steps to contain bond yields if needed, according to a person with knowledge of the matter, after the RBI’s latest move to purchase sovereign notes maturing by 2025.
Economists at Goldman Sachs and Morgan Stanley are among those seeing a downturn already underway as more Wall Street banks slash forecasts.
Strained Chinese economic growth, “more widespread and draconian containment measures to deal with the spread, the emergence of strain in credit markets, and sharp tightening of financial conditions have caused us to revise down substantially our global growth forecasts in the first half of the year,” Torsten Slok, chief economist at Deutsche Bank, said in a research note Wednesday.