Policy Review after 103 corona interest rate cuts?
Since the outbreak of the novel coronavirus, central banks from the South Pacific to the North Atlantic have slashed interest rates 103 times, injected trillions of dollars of liquidity into the financial system, launched a flurry of loan programs and bought bonds in a firefighting exercise to prevent a global recession from becoming a global depression.
Judging from the recent easing of strains in financial markets, this massive bout of monetary stimulus, along with a trillions of dollars of spending by governments worldwide, will help the global economy overcome the shock from the shutdown of large parts of the global economy to limit the spread of Covid-19.
But in the process, interest rates at all the world’s major central banks, are now effectively at the zero-lower bound, raising uncomfortable questions about the future of monetary policy
Even if policy makers are successful in engineering a recovery, both in asset markets and the underlying economy, is there any ammunition left to tackle the next downturn or a sudden crises?
And if asset markets fail to recover, what then? More stimulus?
With interest at rock-bottom, the answer by central banks in advanced economies is large-scale purchases of both government and private securities, a tactic now used by all Group of Seven (G7) central banks: the U.S., Japan, the euro area, the U.K and Canada.
But it’s not just central banks in developed markets that are using the monetary tool of asset purchases, or quantitative easing. Now it’s being used worldwide.
Chile’s central bank is buying bank bonds while the central banks of Israel, Poland, Colombia, the Philippines, South Africa, Jamaica and Iceland are buying government debt in the secondary market.
The problem is this tool has been employed to little avail by the Bank of Japan for almost two decades, by the European Central Bank for five years and by the Federal Reserve in various phases since the global financial crises in 2008.
While asset prices prices have risen and debt has accumulated, economic growth has trended downward and the wealth gap has widened.
This year started out on a promising note, with uncertainty from the U.S.-China trade conflict easing, confirming the general view the global slowdown was bottoming out.
Several important emerging markets, such as Turkey, South Africa and Malaysia, still lowered rates in January due to lingering uncertainty and domestic weakness.
Meanwhile, under the radar of most investors, the coronavirus claimed its first Chinese victim on Jan. 11 before authorities on Jan. 23 shut down the industrial of Wuhan, the epicenter of the outbreak, to prevent the spread of the virus.
Despite a 10 percent drop in Shanghai stocks in late January, U.S. and global stock markets continued their upward march until Feb. 19, despite the growing storm on the horizon.
Although central banks normally trail changes in financial markets, this time they were ahead.
Illustrating just how interwoven the global economy has become, Sri Lanka’s central bank was the first central bank to refer to the coronavirus when it lowered its rate on Jan. 29, days before China’s central bank on Feb. 3 began to pump in liquidity to the banking system at lower interest rates.
Thailand’s central bank then followed suit by cutting its rate on Feb. 5 and since then the rate cuts have come at a fast and furious pace, spanning the globe from Mongolia to Mauritius.
Since late January, when the outbreak of the coronavirus first began to affect financial markets, policy rates have been cut an astounding 103 times, with many central banks cutting rates multiple times in response to the growing threat to economies worldwide.
Illustrating the speed with which the threat to economic growth has mushroomed, 53 of those rate cuts have been taken at multiple extraordinary policy meetings, such as those by the U.S. Federal Reserve, the Bank of Canada, the Bank of England and the Reserve Bank of Australia.
From the beginning of 2020, 67 different central banks have cut policy rates 111 times by a cumulative 86.28 percentage points, or a net reduction of 81.88 points when taking into account the four rate hikes seen this year from Kazakhstan, the Czech Republic, the Kyrgyz Republic and Denmark.
Including other measures taken to ease monetary policy in addition to rate cuts – such as cutting lowering reserve requirements, countercyclical capital buffers, injecting large-scale liquidity, launching new low-cost loan programs or restarting asset purchases – there have been at least 189 steps to ease monetary policy.
The global monetary policy rate (GMPR), the average interest rate by 97 central banks worldwide, has plunged 84 basis points this year to 4.85 percent from 5.69 percent at the end of 2019, 6.42 percent at end-2018 and 5.99 percent at end-2017.
The following 63 central banks cut rates 84 times in March: Australia (twice), Malaysia, USA (twice), Saudi Arabia (twice), Bahrain (twice), UAE (twice), Qatar (twice), Kuwait (twice), Jordan (twice), Hong Kong (twice), Macau (twice), Moldova (twice), Canada (three times), Paraguay (twice), Argentina, Mauritius, UK (twice), Iceland (twice), Serbia, Mongolia, Ukraine, Norway (twice), New Zealand, South Korea, Sri Lanka, Czech Republic (twice), Egypt, Chile (twice), Costa Rica, Armenia, Turkey, Pakistan (twice), Vietnam, Tunisia, Morocco, Poland, Fiji, Trinidad & Tobago, Ghana, Sierra Leone, Brazil, Dominican Republic, Taiwan, Philippines, Indonesia, South Africa, Honduras, Thailand, Namibia, Romania, Mexico, Eswatini, Seychelles, Lesotho (twice, Kenya, Bangladesh, Democratic Republic of Congo, Albania, Zimbabwe, India, Colombia, Barbados and Vanuatu.
Singapore is not included in this list as it uses the exchange rate as a monetary policy tool. However, it has also eased its policy by letting its dollar depreciate.
Kazakhstan and Denmark stand out as the only central banks to have raised rates in March.
14 central banks cut rates 15 times in February: Iceland, Thailand, Brazil, Honduras, Philippines, Russia, Belarus, Mexico, Argentina (twice), Namibia, Turkey, China, Indonesia and The Gambia.
Two central banks, the Czech National Bank and the National Bank of the Kyrgyz Republic, raised rates.
11 central banks cut rates 13 times in January: Argentina (3 times), North Macedonia, Turkey, South Africa, Malaysia, Kenya, Lesotho, Sri Lanka, Ukraine, Costa Rica and Azerbaijan, with rates lowered by a cumulative 1,125 basis points while Tajikistan raised its rate.
2020 BY MARKETS
Central banks worldwide have taken 198 policy decisions so far this year, with policy rates cut 111 times and only raised five times.
Central banks in developed markets have decided on monetary policy 29 times this year, with seven banks cutting their rates 14 times: Australia, the United States (twice), Hong Kong (twice), Canada (three times), the UK (twice), Norway (twice) and New Zealand.
Denmark raised its rate but this is the context of a policy framework in which the Nationalbank pegs the krone to the euro. The rate hike should support the krone which has come under downward pressure as capital flows to more liquid currencies.
Emerging market central banks have decided on monetary policy 58 times, with 21 banks cutting rates 34 times: Turkey (three times), South Africa (twice), Malaysia (twice), Thailand, Brazil (twice), Philippines (twice), Russia, Mexico (twice), China, Indonesia (twice), UAE (twice), Qatar (twice), South Korea, Chile (twice), Czech Republic (twice), Egypt, Pakistan (twice), Poland, Taiwan, India and Colombia cutting policy rates.
After raising its rate in February, the Czech Republic reversed course in March and cut its rate.
Central banks in frontier markets have decided on monetary policy 41 times, with 15 banks cutting rates 26 times: Sri Lanka (twice), Kenya (twice), Ukraine (twice), Bahrain (twice), Kuwait (twice), Jordan (twice), Mauritius, Serbia, Morocco, Tunisia, Vietnam, Ghana, Romania and Bangladesh. Argentina has cut six times.
Kazakhstan has raised its rate once while Nigeria raised its reserve requirement.
Central banks in other markets have decided on monetary policy 70 times, with 25 banks cutting rates 33 times: North Macedonia, Kenya, Lesotho (twice), Azerbaijan, Honduras (twice), Iceland (three times), Belarus, Costa Rica (twice), Namibia, The Gambia, Saudi Arabia (twice), Macao (twice), Moldova (twice), Mongolia, Trinidad & Tobago, Dominican Republic, Sierra Leone, Paraguay (twice), Fiji, Eswatini, Seychelles, Democratic Republic of Congo, Albania, Zimbabwe and Vanuatu.
Kyrgyzstan and Tajikistan have raised their rates while Curacao has raised its reserve requirement to curb liquidity.
Prior to the outbreak of the coronavirus, 2019 was characterized by the most synchronized monetary easing since the global financial crises in 2008-2009.
Sixty-seven different central banks cut their key interest rates 159 times in response to the lowest growth of in a decade due to the damaging effect of trade conflicts on global manufacturing, confidence, and the lagged effect of monetary tightening in 2018.