Central banks begin to act on coronavirus
The US Federal Reserve (Fed) has followed the Reserve Bank of Australia (RBA) by cutting rates by 0.5%.
The Fed's Open Market Committee issued a statement that said the fundamentals of the US economy remain strong, but that "the coronavirus poses evolving risks to economic activity."
The rate cut comes after central banks pledged to take decisive action to tackle the economic fallout from the spread of the virus. Finance ministers from the G7 group of economies also met on Wednesday to discuss possible action.
Commenting on the surprise Fed move, Schroders' Chief Economist Keith Wade said:
"It seems that either the Fed knows something that no one else knows, or it is panicking.
"Business surveys do point to slower activity as a result of weaker demand from China and supply chain issues; however, there has not been a collapse in US activity."
"Meanwhile, the number of cases remains low. Certainly things can get worse and we expect activity to be flat in the first quarter, but we had expected greater confirmation of this before the Fed acted.
"By making a move now the Fed is signalling that it will support the economy come what may. But it risks adding to the sense of panic surrounding the virus."
Australia makes first cut
Earlier, the RBA became the first central bank to cut interest rates explicitly in response to the worsening of the COVID-19 (coronavirus) outbreak.
It's worth noting that China cut rates in February, but did not explicitly cite coronavirus in its statement.
The RBA cut the rate by 25 basis points to 0.50% in a bid to “support the economy as it responds to the global coronavirus outbreak”.
The RBA's statement highlights that “the coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected” while the economy was on an improving path.
Additionally, the Australian Bank acknowledged that it is difficult to predict how large and long-lasting the effect of the virus would be. The education and tourism sectors of Australia, largely dependent on China, have already started to see the impacts of the coronavirus outbreak. However, the economy could get weaker as “the uncertainty that it is creating is also likely to affect domestic spending”, confirming that that COVID-19 is not just a supply, but also a demand shock.
Forward guidance remained mildly dovish (i.e. supportive of low interest rates), and the bank will continue to monitor development closely. The statement concluded with the sentence “the board is prepared to ease monetary policy further to support the Australian economy”.
In our coronavirus pandemic scenario, in which the coronavirus continues to spread and no longer remains contained within China as Europe, the Americas and the rest of Asia see a significant increase in cases, more policy easing is expected.
If this happens, the RBA is likely deliver one more cut this year, as more monetary stimulus is expected globally.
Our expectations were for the US Federal Reserve to cut rates from 1.75% to 1.25%, a move that was just announced at the time of writing.
We expect the European Central Bank to cut from -0.5% to -0.8% by the end of 2020.
The Schroders Economics Group will be publishing views as events develop. Check back here for regular updates – or read a broader assessment here:
Other articles published in response to the coronavirus crisis can be found here:
- What can the Covid-19 crisis teach us about tackling climate change?
- Covid-19 poses temporary setback to the energy transition
- European multi-asset: is there anywhere to hide?
- Has the S&P already reached its low for this recession?
- Infographic: A snapshot of the global economy in May 2020
- What can investors do to better prepare for market opportunities and challenges?