The G7 nations are drafting a statement outlining a plan to soften the economic hit of the COVID-19 outbreak, but which so far excludes direct calls for new government spending or coordinated central bank interest rate cuts, a G7 official said yesterday.
In the statement, expected to be released yesterday or today, the G7 would pledge to work together to mitigate the damage to their economies from the coronavirus outbreak, the official said on condition of anonymity due to the sensitivity of the matter.
The news disappointed financial markets, which were hoping for more explicit measures of support by the seven major industrial powers.
US stock futures slipped into negative territory and the US dollar gave up earlier gains against the safe-haven Japanese yen.
Global equities on Monday had rallied sharply as central banks from Japan, the UK and France followed the lead of the US Federal Reserve in saying they stood ready to support the global economy.
The language of the G7 statement could change as it was still under discussion, the source said.
AxiCorp Financial Services Pty chief market strategist Stephen Innes said that such a message from the G7 was not what markets had been hoping for.
“At this stage, I don’t think the G7 are willing to show their stimulus hand and are holding back the fiscal cannons for a later date once they can better quantify the supply-side shock” from the outbreak, Innes said in a client note.
The US — the G7 chair this year — said the group’s finance ministers and central bank governors would hold a conference call yesterday to discuss measures to deal with the coronavirus outbreak and its economic impact.
However, analysts had doubts about how effective interest rate cuts might be.
While central bank and fiscal policy can boost demand by lowering the cost of borrowing and putting money in people’s wallets, they cannot repair disrupted global supply chains or convince people to fly if local governments or companies bar such activities, analysts said.
With interest rates in Japan and Europe already in negative territory, those doubts are even more amplified, suggesting the Bank of Japan and the European Central Bank could seek alternatives to simply cutting rates.
“A lower price of money does not fix the fear that people have of catching the virus,” Commonwealth Bank of Australia foreign exchange analyst Joe Capurso said. “That is what’s causing the economic disruption and lower interest rates aren’t going to fix the fear.”
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