Central bankers have pledged to take decisive action to stem the economic harm caused by the spread of coronavirus, as finance ministers from the G7 group of leading economies prepare to discuss possible stimulus measures.
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.
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.
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.
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.”
He will participate in the G7 finance ministers’ call later on Tuesday, after which the ministers are expected to make a joint statement about the possible stimulus options available to them.
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.
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.
The Reserve Bank of Australia said the outbreak is 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 amid growing concerns among policymakers that Australia could face its first recession in almost three decades.
In a statement Philip Lowe, RBA governor, said: “The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors.”
He added that GDP growth in March was likely to be “noticeably weaker than earlier expected”.
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 is 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 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.