Central banks across world are set to solve economic challenges of the pandemic

Wall Street is now braced for the Fed to step up its response to the threat posed to the global economy by the pandemic when it meets in Washington on 18th March 2020. Coronavirus concerns are gripping the world as an initial supply shock morphs into a financial shock and now a demand shock. Considering the potential economic damages due to Covid-19, the Central banks of leading nations have leapt into action, though they are still in the early phase.

The world’s most powerful central bank, the US Federal Reserve, is preparing a fresh attempt to shore up investor confidence despite a late rally on Wall Street on Friday that ended a torrid week for stock markets on a more positive note.

The US central bank is expected to cut interest rates by at least half a percentage point and announce a fresh wave of the money-creation programme known as quantitative easing as it seeks to revive confidence among traumatised investors. The expectations are that the Fed could go for a full one point off US borrowing costs, currently running in a range of 1% to 1.25% amid fears that growth in the world’s biggest economy could collapse over the coming months due to Covid-19 impact.

Donald Trump, who triggered the 12th March 2020 market mayhem world across by imposing an EU travel ban, stepped up pressure on the Fed chairman by stating that “The Federal Reserve must FINALLY lower the Fed Rate to something comparable to their competitor Central Banks.”

More central banks on 13th March 2020 moved to try to prop up their economies. The People’s Bank of China said it would lower the amount of cash that banks lending to businesses needed to hold in an effort to stimulate more loans. The Bank of Japan also promised to boost liquidity in markets used for bank financing.

Fresh pledges of help from Germany and the European commission combined with Donald Trump’s declaration of a national emergency over coronavirus have come in to reassure investors after an ordeal for equities on both sides of the Atlantic that echoed the depths of the banking crisis.

According to Capital Economics (U.K.) the coronavirus has become a pandemic, the costs to the world economy have risen significantly. Forecasts now include recessions in the eurozone and Japan. The US will teeter on the brink of one too. Global output may fall by 1.2% quarter-on-quarter in the first three three months of 2020, led by contractions in Asia. This is not far short of the 1.6% drop in world output seen at the depth of the global financial crisis in the fourth quarter of 2008.

Oil prices also recovered before falling steeply, with Brent crude futures rising before slumping back to $34 a barrel. The forecasts for oil prices over the course of the year, from above $60 a barrel to only $42, stems amid a price war between Saudi Arabia and Russia.

The spread of the coronavirus in China seems to be slowing down but the global supply chain remains broken. As a result, revised growth forecast of China stands at 4.4% YoY in 1Q20 and 5.2% for this year

Given the US dependency on the capital markets for financing, the Fed looks set to be at the forefront of the monetary response to the Covid-19 crisis. The end of the US ‘exceptionalism’ in terms of growth and interest rates means that we should now be looking at a temporary 5-10% correction in the dollar.

On India front, a UN report estimated a trade impact of US$ 348 million due to the outbreak, making India one of the 15 worst affected economies across the world. Asian Development Bank estimated that the outbreak could cause losses of upto US$ 29.9 billion to India’s economy. Reserve Bank of India’s response is still awaited.

Though, risk assets were the darlings of 2019, tainted now with virus risks, they are seriously stressed. In 2020, debt markets may prove to be the safe havens versus the bigger risk implied in equity markets.

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