The US Federal Reserve and other central banks moved aggressively with sweeping emergency rate cuts and offers of cheap funds to help combat the COVID-19 pandemic that has jolted markets and paralyzed large parts of the world economy.
The coordinated response from the Fed to the European Central Bank and the Bank of Japan (BOJ) came amid a meltdown in financial markets as investor anxiety deepened over the difficulty of tackling a pathogen that has left thousands dead and put many countries on virtual lockdowns.
The Fed moved first on Sunday, cutting its key rate to near zero and triggered emergency policy easings by central banks in New Zealand, Japan and South Korea.
“The virus is having a profound effect on people across the United States and around the world,” Fed Chairman Jerome Powell said at a news conference after cutting short-term rates to a target range of 0 percent to 0.2 percent, and announcing at least US$700 billion in US Treasuries and mortgage-backed securities purchases in the coming weeks.
The Reserve Bank of New Zealand slashed rates to a record low as markets in Asia opened for trading this week, while Australia’s central bank pumped extra liquidity into a strained financial system and said it would announce more policy steps on Thursday.
Later, the BOJ too eased policy in an emergency meeting, ramping up purchases of exchange-traded funds and other risky assets to combat the widening economic fallout from the pandemic.
South Korea stepped in as well, with a 50 basis point rate cut in a rare inter-meeting review yesterday.
“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. “We can continue to pump ample liquidity into the market.”
The measures did little to calm market nerves, though, as Asian shares and US stock futures plummeted, underscoring the fears that the health crisis might prove much more damaging to the global economy than initially anticipated.
“Market reactions to each surprise monetary policy easing have been sell first and ask questions later,” said Selena Ling (林秀心), head of treasury research and strategy at OCBC Bank (華僑銀行) in Singapore.
“The more unprecedented measures by the Fed and other central banks, the more investors worry if [they] know something we don’t ... fear remains the crux of the problem here as market players remain unconvinced that monetary policy easing and liquidity injections will solve an essentially healthcare crisis,” she said.
Many analysts are predicting a marked downturn in the world economy.
“A global recession has moved from a risk case to a base case,” said Matt Sherwood, Sydney-based head of investment strategy at investment firm Perpetual Ltd.
“Financial conditions are tight and are likely to remain so until the coronavirus’ growth rate slows, and stimulus is enhanced. This may take considerable time as oil prices are implying high stress in credit markets,” he said.
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