Central banks lagging, 2008-style coordination missing

Almost a week since the world’s top financial officials pledged to use “all appropriate policy tools” to protect their economies from the coronavirus outbreak, markets are slumping and investors are wondering where the central banks are.

While the US Federal Reserve and the Bank of Canada slashed their key interest rates almost immediately after the Group of Seven teleconference last Tuesday, their peers are moving much more slowly. None of the major European institutions have cut rates, nor has the Bank of Japan. Chinese measures have been limited.

It’s a far cry from the 2008 financial crisis, when six of the world’s major central banks cut rates in a coordinated move, and the Bank of Japan issued a statement saying it supported the action. Some policy makers may be hoping governments can take the strain with fiscal stimulus. Interest rates are far lower than they were in 2008, and radical measures such as asset purchases and cheap long-term loans have stretched central banks almost to their limits. “The Fed’s emergency cut last week didn’t do what it was supposed to do, which is provide a clear support to markets,” Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management, told Bloomberg Television. “I think if it was coordinated, perhaps so, but it’s very hard to coordinate across central banks when we’re at the limits of ammunition.”


Yet with an oil crash adding to the sense of emergency, the pressure is mounting for monetary authorities to prove they haven’t totally exhausted their powers.

EURO-ZONE LIMITS
The ECB holds a scheduled policy meeting on Thursday, and officials have so far shown no sign they intend to act before then. Even when they do, the measures might not be dramatic. Investors expect a 10 basis point rate cut, and some economists predict bond purchases will be boosted. A measure to direct liquidity to struggling small firms looks likely.

The dilemma is that the deposit rate is at record-low minus 0.5% and quantitative easing, which was resumed last year, is nearing limits intended to prevent the program breaching European Union law. Under President Christine Lagarde, officials have expressed concerns that their ultraloose policies will damage the banking system and cause asset bubbles. Any action will limit future options even further, meaning a common refrain from officials is likely to grow louder: governments must do more. So far though, only Italy has announced significant fiscal measures. Germany, the region’s largest economy and the one with the most public cash to spare, agreed on limited steps after more than seven hours of talks late Sunday.

SWISS HAVEN
The franc’s exchange rate plays an outsize role in the Swiss National Bank’s policy calculus, so officials are likely to wait for what’s announced by the ECB. A package of targeted loans wouldn’t exert as much pressure on the currency as a rate cut, lessening the pressure for the central bank to respond.

SNB President Thomas Jordan has said there’s room to reduce borrowing costs further, and the franc has surged to its strongest in five years against the euro. But banks already are up in arms about the minus 0.75% deposit rate, which means policy makers are probably reluctant to take any measures that’s aren’t absolutely necessary.

BRITISH BUDGETING
The BOE’s next scheduled meeting is March 26, though it may not wait that long. The Treasury, led by a chancellor, may deliver a package in the budget on March 11, and there’s a chance the BOE follows up with complementary measures. Governor Mark Carney, whose term ends on March 15, has already said the bank has room to cut its benchmark rate near to zero – it’s currently 0.75% – and can take other steps as well. His successor, Andrew Bailey, has said fiscal policy or targeted loans to small businesses should be the focus.