Panic Stations & Extraordinary Sessions
In an unscheduled emergency session - last conducted 12 years ago during the financial crisis - the Bank of England has cut interest rates to 0.25%. The lowest level in the bank's 326-year history.
MORE POLICY RESPONSES TO CALM PANICKED FINANCIAL MARKETS
The coming week’s focus will remain on fiscal and monetary responses to the deepening coronavirus crisis. Reports suggest that US and European authorities are preparing for more fiscal stimulus. In the US, it remains to be seen how quickly the Trump administration and Congress can agree measures, with both the timing and the size of the package being important. In Europe, meanwhile, there are reports that the German government may be prepared to ditch its longstanding balanced budget strategy to combat Coronavirus. At the European level, officials have said the EU will do “whatever is necessary” and allow maximum flexibility in fiscal rules to enable governments to provide support for the economy. The US Federal Reserve will hold its regular policy meeting next week (Tue/Wed), having already made an emergency 50bp rate cut to 1.00-1.25% on 3 March. Fed fund futures have factored in a substantial further reduction in interest rates in excess of 75bp, which would bring them close to zero. The majority of economists anticipate a smaller decrease of 25bp or 50bp, but a larger and earlier cut cannot be ruled out as policymakers may be wary of disappointing the markets and it may be important to act early and decisively. The Fed may also consider other policy measures including those such as restarting QE or ‘operation twist’ that would help to reduce longer-term interest rates. The Fed may also want to follow the lead of other central banks, including the BoE and ECB, and look at more targeted measures that would help tide businesses through the current uncertainties.
The Bank of Japan and Swiss National Bank are scheduled to announce their policy decisions next week (both Thu). The focus will be on the BoJ in particular – while interest rates will probably be left on hold, it is expected to adopt other measures such as buying more assets and introducing a new lending programme targeting companies affected by Covid-19.
THE DASH FOR CASH
The past week saw global equity markets plunge, as investors reached for the safety of cash. Short-selling bans were introduced, while government bond yields reached all-time lows before rising again. Concerns about the economic effect of Covid-19 continued to rise, with fears of a deeper and/or more protracted impact. Investors have yet to be convinced of the effectiveness of the global policy response. In that respect, the UK’s coordinated monetary and fiscal response may serve as a template for other jurisdictions, including the US and Europe.
FOCUS ON WHETHER ENOUGH?
The Bank of England reduced Bank Rate by 50bp to 0.25% (matching the all-time low), but also key were its accompanying measures – including a new Term Funding scheme for SMEs (TFSME) – to ensure liquidity continues to flow to the wider economy. New Chancellor, Rishi Sunak, meanwhile announced a raft of measures to tackle near-term risks and to meet the government’s pledges of “levelling up” and also “unleashing Britain’s potential”. Nevertheless, the pound fell towards $1.25, as demand for US dollar rose amid heightened risk aversion. In contrast, the ECB decided to keep its benchmark interest rates unchanged and President Lagarde called on European governments to take timely and targeted action. With rates already very low (the deposit rate at -0.5%), the ECB focused on the transmission of low rates to the wider economy, including temporarily increasing the pace of bond purchases to lower corporate borrowing costs and, for smaller companies, providing more favourable terms for liquidity provided to banks. The US Federal Reserve, meanwhile, took measures to inject significant cash into the Treasury market, where yields were rising from all-time or near all-time lows due to a lack of liquidity despite investor flight to safety. The People’s Bank of China, Bank of Japan and Reserve Bank of Australia were among central banks joining the Fed in adding liquidity to markets. The Norges Bank also cut interest rates by 50bp to 1% ahead of its scheduled policy announcement next week.
TIMELY DATA RELEASES
Markets have not paid a huge amount of attention to economic data releases of late, partly because they have been mostly backward-looking, predating the escalation of coronavirus concerns. However, we will start to get some data that start to capture the impact of the outbreak. China will release retail sales, industrial production and fixed asset investment data for January and February combined (Mon). In the US, retail sales and industrial production figures for February (Tue) will be released, but timelier business surveys for March, including the NY Empire (Mon) and Philly Fed (Thu), will be watched particularly closely. In Europe, the German ZEW survey (Tue) is forecast to show sharp falls in investor economic sentiment. UK labour market data (Tue) will be for January and therefore backward-looking, but are expected to reaffirm strong jobs growth before awareness of the Covid-19 crisis took hold. Andrew Bailey also becomes BoE Governor on Monday, taking over from Mark Carney. In a sign of policy continuity, both he and Carney appeared in the press conference together following the decision on Wednesday to cut rates by 50bp to 0.25%. The announcement of accompanying measures to support the economy. The minutes of that meeting reaffirmed that there is scope for more monetary stimulus, if needed, including the possibility of lower interest rates, restarting QE and enlarging the TFSME.
See you next week!
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