'Short on Bullets...' Central Banks Worldwide Contemplate Interest Rate Cuts

Pressure to cut interest rates intensifies but hesitant to guarantee effect
BoE Governor Nominee: "Must wait until economic damage becomes clear"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Central banks around the world have found themselves in a dilemma following the U.S. Federal Reserve's (Fed) sudden interest rate cut. The pressure on central banks to step in to mitigate the economic impact caused by the novel coronavirus disease (COVID-19) has intensified, but concerns have arisen that unlike the Fed, many lack the 'ammunition' to use rate cuts effectively, and that the effects may not be immediate.

This can be seen from the positions of Canada and the United Kingdom. According to major foreign media on the 4th (local time), the Bank of Canada lowered its benchmark interest rate by 0.5 percentage points from 1.75% on the same day. This rate cut came just one day after the Fed's dramatic 0.5 percentage point cut. The Bank of Canada stated, "COVID-19 is having a materially negative impact on both the Canadian and global economic outlook," adding, "We are prepared to take further monetary policy measures if necessary to support economic growth and maintain our inflation target."

On the other hand, the Bank of England (BoE) is negative about rate cuts. Andrew Bailey, who will assume office as BoE Governor on the 16th, appeared before the Parliamentary Treasury Committee on the same day and emphasized, "At this point, we need more evidence before lowering interest rates," and that it is necessary to wait until the economic damage becomes clearer. He suggested that it would be more reasonable to expect economic support for supply chains rather than monetary policy, placing emphasis on support for small and medium-sized enterprises.

A source from the European Central Bank (ECB) also told foreign media, "The market, the media, and the Fed's rate cut are putting enormous pressure on us to act," but added, "We will move toward emergency measures but will try to hold out." The source further said, "We are not sure what we are doing. No one really knows the actual damage." In fact, ECB members Robert Holzmann and Peter Kazimir have officially expressed concerns about immediate responses one after another.

The central banks of the Group of Seven (G7) agreed on the 3rd to deploy all possible policy tools to prevent a recession, but in reality, there are not many policies left to use. Especially in Europe and Japan, where negative interest rates are already in place, there is virtually no room for further rate cuts.

Accordingly, the central banks of Europe and Japan are likely to seek alternative measures. With International Monetary Fund (IMF) Managing Director Kristalina Georgieva stating that economic growth this year is expected to fall below last year's level (2.9%) due to COVID-19, the possibility of a real economic slowdown is increasing, making it necessary to take some form of action. Market speculation suggests that the ECB will implement additional long-term refinancing operations (TLTROs), which provide cheap loans to banks that lend more to the real economy. It is expected that liquidity will be supplied with clear targeting where needed.

The Bank of Japan (BOJ) first supplied liquidity to the market through open market operations on the 2nd and 3rd. Although this was the first open market operation in four years, only 30% of the planned amount (500 billion yen) was auctioned. This indicates that Japanese financial institutions did not have a strong need to secure funds immediately, and the BOJ is seen as having sent a message that it will intervene directly if there are problems in the financial market. The Nihon Keizai Shimbun pointed out, "The financial shock caused by the global financial crisis, which reached the real economy, and the economic impact through the spread of COVID-19 shaking the financial markets now are different in terms of the effectiveness of monetary policy," adding, "With large-scale easing policies such as negative interest rates continuing for a long time, the BOJ has few cards left. The difficulty of response may be even higher than in 2008."

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