Macro (Re)view (20/3) | Global central banks go all-out with stimulus

Central banks across the globe this week came out in a show of force doubling down on their efforts to provide support to their economies in response to the covid-19 outbreak and in an attempt to ease liquidity strains in the market and calm rampant volatility. Add in rising concerns around credit risk and that goes some way to explaining the unrelenting surge in demand for the US dollar over the week despite the precarious outlook for the US economy. According to analysis by Bloomberg, more than 30 rate cuts were announced by central banks through the week, while global fiscal stimulus packages are now pushing the US$2tn level and are set to rise much higher.    
    
Before the open on Monday (Sunday night local time), the US Federal Reserve announced an emergency rate cut of 100 basis points lowering the fed funds rate to 0-0.25%, accompanied with the forward guidance that rates will be kept at that level until its policy-setting Committee "is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals". Balance sheet expansion is also being turned up to full throttle "over the coming months" by at least US$700bn, with Treasury purchases to increase by $500bn and mortgage-back securities by some $200bn. Whereas the Committee's recent focus regarding Treasury purchases was aimed at ensuring the fed funds rate remained within its target range, this is very much a return to the large-scale quantitative easing it has turned to on three previous occasions in the post-financial crisis era. Meanwhile, the Fed also revived a range of facilities to ensure smooth functioning and liquidity for commercial paper, money markets and primary dealers, as well as swap-lines with 14 other central banks across the globe to address the issue pertaining to the stretched supply of US dollars across markets. On the fiscal front, Washington is making preparations for a stimulus package in the order of $1tn to bolster the economy against covid-19, of which $500bn will be set aside for payments to households, $300bn in loans to assist small businesses, $150bn in funding for impacted sectors and $50bn specifically for the airline industry.   

Across the Atlantic, the European Central Bank followed up last week's announcements (discussed here) by unveiling a €750bn Pandemic Emergency Purchase Programme (PEPP) with the continent facing a severe hit to economic activity from covid-19. Recent missteps in communication from the Bank resulted in a widening of peripheral bond spreads, hampering the transmission of its monetary policy settings. Keen to address these market dislocations and any perception that it was out of ammunition, the Governing Council's statement was from the playbook of its former President Mario Draghi of doing "whatever it takes" to support the single currency. As such, while the PEPP will see €750bn in purchases of public and private sector securities take place through to the end of the year, its size, duration and composition can all be increased or adjusted as required. Most notably, existing limits self-imposed by the ECB relating to government bond purchases (in line with the capital key) are to be relaxed in the PEPP, which will allow it to target dislocations in spreads, as occurred in Italian bonds last week, that would otherwise impair the ability of governments to support their economies through this shock. Underlining this point, the Governing Council's statement contained the line that it would "not tolerate any risks to the smooth transition of its monetary policy in all jurisdictions of the euro area". Together with earlier announcements, the ECB's asset purchases will ramp up by some €1.1tn out to the end of the year. Over in the UK, after last week's measures (discussed here), the Bank of England (BoE) came through with further stimulus announcing a 15 basis point cut in the Bank Rate to 0.1% and a £200bn increase in asset purchases. In conjunction with the Treasury, the BoE has established its Covid Corporate Financing Facility that will provide liquidity to firms to help them mitigate the impact of cash flow disruptions. 

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Switching the focus onshore, the unfolding disruptions from the covid-19 outbreak prompted a coordinated response from Australia's monetary and fiscal authorities this week (full analysis of those measures here). On the monetary side, the Reserve Bank of Australia (RBA) Board announced sweeping policy changes at a special meeting this week making its first foray into the unconventional space. The main decisions the Board made were; a 25 basis point rate cut lowering the cash rate to its effective lower bound of 0.25% (see chart of the week, below), commencing quantitative easing and setting a target of 0.25% for the 3-year Commonwealth Government bond yield, establishing a new funding facility of A$90bn in 3-year money at a fixed rate of 0.25% to encourage banks to lend to small and medium-sized enterprises, and an upward adjustment to interest accruing on banks' excess reserves held at the RBA. 

Chart of the week

Market functioning was also a clear consideration, with the Board announcing that it will continue to provide daily liquidity through one and three-month repo operations, while the Bank has also established a swap line with the Fed to ensure the provision of US dollars for domestically-based financial institutions. RBA Governor Philip Lowe outlined in a speech following the Board's announcements that these policy changes were made "to help support jobs, incomes and businesses as the Australian economy deals with the coronavirus" and were required "in the context of extraordinary times". Certainty, these policy settings will not be short term, with Governor Lowe indicating in the press conference that bond purchases and rates at the lower bound could be the status quo for the next few years. The Federal government is currently working through the details of a second stimulus package to complement the $17.6bn already announced, while the Treasury this week unveiled $15bn in liquidity to be injected into the nation's wholesale funding markets through the Australian Office of Financial Markets to assist the flow of credit to households and businesses. The markets will have also welcomed the announcement by the Australian Banking Association that lenders will provide loan deferrals for small businesses impacted by covid-19 for up to six months, while the major banks are also prepared to offer six-month deferrals on residential mortgages. 

On the data front this week, February's update on labour market conditions was stronger than expected (full review here) but was of little market interest given that it preceded concerns around the covid-19 outbreak in Australia. Employment increased by 26.7k in the month — well clear of the consensus forecast for a 6.3k rise — while the unemployment rate declined from 5.3% to 5.1% in a reversal of its uptick in January. Clearly, the labour market faces significant headwinds in the months with hiring likely to freeze up and hours worked decline in response to disrupted trading conditions. The key for policymakers is to contain or limit a rise in unemployment over the next few months that would impair the recovery of economic activity once concerns around covid-19 subside.