Covid-19 – initially looked upon as largely a China-centric outbreak – has now become a global health crisis. And the pandemic is wreaking havoc on markets and economies across the world.
The US Federal Reserve and its global counterparts have moved aggressively with sweeping emergency rate cuts and offers of cheap dollars to help combat the coronavirus pandemic.
The co-ordinated response from the Fed to the European Central Bank (ECB) and the Bank of Japan (BoJ) came amid a meltdown in financial markets as investor anxiety deepened over the difficulty of tackling the pathogen.
The Fed moved first on Sunday, cutting its key rate to near zero in a move reminiscent of the steps taken just over a decade ago in the wake of the financial crisis.
The US decision triggered emergency policy easings by central banks in the Gulf, New Zealand, Japan and South Korea, with Australia also joining with a liquidity injection in a co-ordinated move aimed at stabilising confidence as the pandemic threatens a global recession.
“The virus is having a profound effect on people across the United States and around the world,” Fed chair Jerome Powell said in a news conference after cutting short-term rates to a target range of 0% to 0.25%. He also announced at least $700bn in Treasuries and mortgage-backed securities purchases in coming weeks.
“I don’t think we have reached a limit on how deep we can cut interest rates,” BoJ governor Haruhiko Kuroda said.
“If necessary, we can deepen negative rates further,” he added.
The People’s Bank of China (PBoC), which has rolled out powerful stimulus measures since the outbreak began in the country’s Hubei province late last year, was a bit of an outlier as it kept its rates steady, though analysts expected a cut later this week.
The measures did little to calm market nerves though, as Asian shares and US stock futures plummeted on Monday, underscoring the fears the health crisis might prove much more damaging to the global economy than initially anticipated.
International Monetary Fund managing director Kristalina Georgieva on Monday said 20 additional countries have asked about receiving aid from the global lender as the pandemic halts economic activity. She also called for strong and co-ordinated fiscal stimulus to limit the damage.
In a blog post on the IMF website, Georgieva said the Fund was ready to mobilise its full $1tn lending capacity to help member countries deal with the crisis.
Analysts at major banks and ratings agencies are now predicting a marked downturn in the world economy, and some say a recession is unavoidable.
The extent of the economic damage will depend on how quickly the virus is contained, the steps authorities take to contain it, and how much economic support governments are willing to deploy during the epidemic’s immediate impact and aftermath.
According to a study by the World Bank, a severe pandemic could cause economic losses equal to nearly 5% of global GDP, or more than $3tn.
Georgieva, in her blog, suggested that co-ordinated fiscal action on the scale of the 2008-2009 financial crisis may be necessary.