• Thursday, March 28, 2024
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BusinessDay

Finance ministers ‘ready to take action’ on coronavirus

Coronavirus: Six more persons quarantined in Lagos 

Finance ministers and central bank governors from the leading western nations pledged on Tuesday to use “all appropriate policy tools” to maintain economic health as coronavirus spreads around the world.
Following a conference call, finance ministers from the G7 group of leading economies issued a statement pledging action to be taken individually by each nation, although they did not detail any specific measures that would be adopted.
“Given the potential impacts of Covid-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks,” the statement said.

The finance ministers pledged fiscal support to ensure health systems could respond to the disease and to tide economies over during what policymakers now believe is likely to be a serious slowdown for at least a few months.
The OECD warned on Monday that a prolonged outbreak of coronavirus could halve the forecast global growth rate from almost 3 per cent to 1.5 per cent this year.
Mark Carney, the outgoing Bank of England governor, said on Tuesday that the scale of the shock to the global economy “could be large”, with a big impact lasting one or two quarters.

Central banks across the G7 will “continue to fulfil their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system”, the finance ministers said in their statement — a strong indication that monetary policymakers are preparing to cut interest rates and pump more liquidity into their economies.
The G7 backed the IMF and World Bank’s decision on Monday to open credit lines and emergency facilities to lend to countries facing a cash crunch when dealing with the virus.
“G7 finance ministers and central bank governors stand ready to co-operate further on timely and effective measures,” the statement said.

Global stock markets rebounded on Tuesday after last week’s succession of falls, as investors’ expectations intensified that the world’s major central banks and governments would act to soften the virus’s economic blow.
The Reserve Bank of Australia became the first major central bank to take action in response to the economic impact of coronavirus, cutting interest rates on Tuesday by a quarter of a percentage point to a new record low of 0.5 per cent. It was followed shortly afterwards by the Malaysian central bank, which cut its overnight policy rate by a quarter of a percentage point to 2.5 per cent.

The Reserve Bank of Australia said the outbreak was having a “significant effect” on the country’s economy. The Australian government confirmed on Tuesday that it was preparing a “targeted and measured” fiscal stimulus package.
Predicting a “powerful and timely” global response, Mr Carney said: “It is reasonable to expect a response that reflects a combination of fiscal measures and central bank initiatives.”

Speaking to a UK parliamentary committee, Mr Carney said: “Across jurisdictions there will be some differences in exact form of those measures and exact timing but the response will share a common goal to achieve bridging — supporting the economy through a potentially challenging period.”
The lines of communications between the world’s biggest central banks “are wide open”, he added.
His remarks came the day after Christine Lagarde, president of the European Central Bank, said that it was “ready to take appropriate and targeted measures” to address the economic impact of the coronavirus, signalling a growing willingness to intervene.

The European Central Bank is working on several ways to inject cheap money into the eurozone economy that would offer a monetary policy stimulus without cutting rates further into negative territory.
Danae Kyriakopoulou, chief economist at central banking think-tank OMFIF, said: “The ECB is more restricted than other central banks because its rates are already very low and so it is harder for it to cut them further.”
She said this made it more likely to look at alternatives, such as increased cheap lending to banks or more asset purchases.

One idea being looked at by ECB officials is to expand its programme of providing cheap loans to banks to incentivise them to keep credit flowing to companies via the targeted longer-term refinancing operation (TLTRO) programme which it relaunched last year.
The ECB could offer loans to banks at negative interest rates on the condition that the banks keep lending to small businesses affected by the disruption of the virus, either by repurposing its existing TLTRO programme or launching a new one.

Ms Lagarde hinted in her statement on Monday that the bank was considering such measures.
Another option that the ECB is expected to look at is to expand its bond purchase programme to buy more debt issued by companies rather than governments — aiming to ease any strain on corporate finance markets.
While the ECB’s governing council is likely to be reluctant to cut its deposit rate from its already record low of minus 0.5 per cent when it meets on March 12, it could be pressured into this if the euro continues to appreciate against the US dollar and the Federal Reserve cuts rates at its meeting a week later, as many expect.

“The 3 per cent surge in the trade-weighted exchange rate of the euro over the past two weeks has been the largest in four years over such a short period of time,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “More than the level of the currency itself, it is the volatility that will scare the ECB the most.”
Investors are pricing in a bet that the ECB will cut its main deposit rate to minus 0.6 per cent as early as April.
Some ECB governing council members argued against an imminent rate cut in response to the virus, pointing out that such a move would do little to solve the logistical problems caused by the virus.

Robert Holzmann, head of Austria’s central bank, said: “Do we need rate cuts? From an economical point of view: No. The effects triggered by that wouldn’t be new investments.”
Mr Holzmann said an expansion of the ECB’s cheap loans to banks would be “under consideration” but he played down the need for imminent action.
Peter Kažimír, head of the National Bank of Slovakia, said: “Panic and overreaction could cost us a lot.”
The Swiss National Bank said on Tuesday that it was “taking the possible implications of coronavirus into consideration”.

The SNB has moved in lockstep with both the Federal Reserve and the ECB in its rate policy, consistently trying to maintain a level below them to devalue the franc against the dollar and euro.
The franc’s status as a traditional safe haven has put the currency under sustained upward pressure. So far, coronavirus fears have only led to a minor appreciation of the franc against the dollar and the franc has held its level against the euro. The SNB fears any further rise in value for the franc would have catastrophic effects on Swiss industry.
“The coronavirus has increased economic risks: If the international environment were to deteriorate, this would have consequences for Switzerland as a small open economy,” the SNB said.