Rapidly spreading coronavirus is undoubtedly a new and unexpected blow to the global economy, which has been buffeted by a trade war mainly between the world’s two largest economies- the US and China.
Central banks around the world are now keeping a close eye on the already sluggish world economy from slipping further and may mount a “coronavirus rescue” sooner than later.
Investors aren’t buying the idea that central banks’ “wait-and-see approach” to the coronavirus will last, ramping up bets on interest-rate cuts that could start within months.
Money markets now see three Federal Reserve reductions this year – starting next month – and one by the European Central Bank (ECB) in July, a Bloomberg dispatch said.
The Bank of England will cut in May, according to a similar metric. The ECB is in a tougher position than other central banks, with limited ammunition if the situation worsens, and top officials including President Christine Lagarde have signalled that more time is needed to weigh the impact of the virus outbreak.
But even for those with more space, such as the Fed, there are doubts that monetary policy response will prove effective, with the shock concentrated on the supply side of the economy.
“The problem with doing monetary stimulus is that it will have limited impact on the effects of the virus,” said Jens Peter Sorensen, chief analyst at Danske Bank, in Copenhagen. “The Covid-19 virus is keeping people from work, the supply chain is disrupted and tourists are not going to Italy. Monetary policy can do very little.”
So far, the view among central bankers across the world is it’s too early to assess what the economic damage will be.
How much ammunition does central banks have to deal with the crisis remains the central question?
The Federal Reserve’s interest rates are already at low levels, trimmed three times last year as the Trump administration roiled markets in a trade battle with China. The European Central Bank and the Bank of Japan, with interest rates below zero, may particularly struggle for a response effective against the type of trouble stemming from the coronavirus, according to Reuters.
Monetary policy is most potent in bolstering demand by lowering the cost of borrowing - it cannot restore global supply chains that have ground to a halt or convince people it is safe to go on a trip or for businesses to hold a sales convention.
Still, monetary policymakers worldwide have braced to act even while arguing - perhaps hoping - for a base case in which the virus is contained reasonably soon. Markets may have fallen off a cliff, they note; the real economy has not.
Central bankers in recent years have warned broadly that their “toolkit” is limited by globally low interest rates and lingering doubts that bond buying and other strategies will prove effective in another sharp downturn.
Still, whatever the scope for fiscal policy, investors seemed to think events are forcing monetary authorities toward some sort of response even if their firepower is limited.
That’s why many analysts seem to think that global rate cuts are certainly on the radar.
