World’s central banks play a waiting game with the coronavirus

Hong Kong — Global central bankers are biding their time as the coronavirus fallout reverberates through the world economy, which they had hoped was stabilising after its worst year since the financial turmoil of 2009.

While yet to respond with major stimulus, monetary policymakers across the globe have expressed concern and signalled a willingness to act if the virus delivers a triple and sustained blow to demand, inflation and financial markets.

Bank of Japan (BOJ) governor Haruhiko Kuroda said on Tuesday that he wouldn’t hesitate to shield his economy. Australia, the developed-world’s most China-exposed economy, said it’s still prepared to lower rates if needed. At the US Federal Reserve, vice-chair Richard Clarida said on Friday that while it remains too early to determine the economic risk from the virus, it is a “wild card”.

The economic pain is playing out in real time. Nike became the latest company to warn of a hit as it said it has closed about half its company-owned stores in China as a result of the outbreak, which it expects to have a “material impact” on its operations in the country. World Bank president David Malpass warned on Tuesday of an enormous amount of uncertainty.

The upshot is that after racing to the rescue of swooning economies in 2019, central bankers are again having to assess a fresh downside risk to their economic outlook and new disinflationary impulse. Their hope is that the virus will soon be contained, enabling a swift bounce back in global growth, without them having to ease already loose monetary policy even further.

“Typically, what’s happened in the past, there may be a short-term impact of an epidemic or a pandemic, but longer term it seems to have relatively little influence and I think many observers are hoping that will be true this time,” former US Fed chair Janet Yellen said in Washington on Tuesday. “But we don’t know where this is going and to my mind it is clearly a source of uncertainty and risk to the global outlook.”

US stocks rallied with crude and copper, while treasuries plunged as investors speculated about the global economy withstanding the effect from the still-spreading coronavirus after China’s market sell-off eased.

Policy dilemma

A dilemma for central banks is that their key rates are already at, or still near, historical lows. Estimates by Bloomberg Economics show that benchmarks across major, advanced economies are already back below neutral, the rate that balances full employment and low inflation.

While that may leave them reluctant to cut in case they need ammunition to fight a future downturn, they may choose to do so in the hope of warding off a renewed economic downturn.

The severe acute respiratory syndrome (SARS) experience 17 years ago may offer reason not to panic. According to James McCormick, a strategist at NatWest Markets, the 2003 “impact on growth and markets was short-lived and once it had passed, the global economy resumed its solid uptrend into the end of year”.

Less confident is Erik Nielsen, group chief economist at UniCredit Bank, who had already been among the few economists to predict that the US Fed would cut rates this year before the virus hit the headlines.

“If the outbreak does not dissipate soon, the authorities in both China and elsewhere are likely to extend travel bans, people will stay at home, and the increase in uncertainty will cause consumers to delay consumption and firms to defer investment,” said Nielsen. “In other words, we think it’s way too early to dismiss this outbreak as just a brief interruption of constructive markets — as much as we wish it is.”

The US Fed’s Clarida stressed that it was too soon to take a firm view on the spillovers to the US, while making clear that the country could absorb a temporary stutter.

“If this were to result in, say, a one- or two-quarter slowdown in growth, that’s probably not something that changes the big picture,” he said on Friday in an interview on Bloomberg Television. “But I do agree it’s a challenging situation. We’re going to keep on top of it.”

The US Fed kept rates steady last week after cutting three times in 2019 and signalled it would probably keep policy on hold throughout this year. Investors have responded to the virus’s spread by increasing bets that officials would cut rates in 2020, according to federal funds futures contracts, though they still only fully price a one quarter-point cut.

“The odds of US Fed cuts are surely going up, and cuts will happen if the consequences of the virus prove large enough,” said Roberto Perli, a partner at Cornerstone Macro and a former US Fed economist. His view is that if the US Fed does cut, it will do so by more than the traditional 25 basis points. “The idea of cuts is not far fetched at all — the bar for cutting rates was previously fairly high, but the coronavirus is bringing it down significantly,” he said.

European Central Bank (ECB) vice-president Luis de Guindos said this week that it’s too early to jump to conclusions. “We are in the first stage of this outbreak and know very little about the characteristics of the virus so far,” he told Greek television station ERT.

Bank of England (BOE) governor Mark Carney described it last week as a “fast-moving issue ... I don’t want to speculate in terms of orders of magnitude of impact on global activity, and blowback to the UK, but it’s something we will be looking at very closely”. 

China’s central bank took its first concrete steps to cushion the economy and plunging markets this week, providing short-term funding to banks and cutting the interest rate it charges for the money. More measures may come in the weeks ahead, with much hinging on how quickly authorities can contain the virus.

“This remains for now a tail risk and a wild card,” said Ben Emons, MD of macro-strategy at Medley Global Advisors. “But central banks will not lag in their response.”

Bloomberg