Central Banks Seem To Be In COVID-19 Agreeance

Central Banks Seem To Be In COVID-19 Agreeance

almost 4 years ago3 mins

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Between the US Federal Reserve’s emergency interest rate cut, the Bank of England’s decision to follow suit, and the European Central Bank’s announcement of a raft of economy-supporting measures, the world’s central banks now seem to be dancing to the same tune where coronavirus is concerned.

🕰️ Recap

  • Earlier this month, the Federal Reserve (the Fed) announced an emergency cut to the US’s interest rates
  • But this week, investors sold off stocks so aggressively that it twice triggered the US stock market’s “circuit breaker”
  • On Wednesday, the Bank of England (BoE) announced its own emergency cut to British interest rates
  • And the European Central Bank (ECB) announced a package on Thursday to help European banks support the region’s businesses

🔗 Connecting The Dots

Less than two weeks ago, the G7 – an intergovernmental organization of the world’s biggest “advanced economies” (Canada, France, Germany, Italy, Japan, the UK, and the US) – promised to do what it could to achieve “strong, sustainable” economic growth. And while the Fed was the first to act with a rate cut, dissenters argued it wouldn’t achieve much: access to cheaper loans, after all, won’t convince people to take a cruise if they’re at risk of contracting coronavirus, or to book a flight if they’re subject to a travel ban.

That view was perhaps driven home by a mass selloff of stocks on Monday – one that only seemed to be appeased by reports that the US government was considering a spending boost of its own. When the US government’s eventual proposals looked like they wouldn’t do enough, the selling then restarted in earnest – and the key stock market index tumbled into a “bear market”.

But that didn't stop the BoE from declaring its own emergency rate cut this week, or the British government from announcing a large – and potentially limitless – spending package to battle coronavirus. The ECB didn’t cut rates like its counterparts, but it did reveal a host of measures designed to help the eurozone economy and the small businesses within it. Add to that Italy’s crescendoing spending plans (despite its already sky-high debt) and Germany’s strategy of abandoning its own budget targets altogether, and optimistic investors might start to think the world’s largest economies are at last moving in sync.

🥡 Takeaways

There’s not much difference between the effects of monetary and fiscal stimulus: both ultimately help control economic growth, or the rate at which prices of goods and services increase (a.k.a. inflation). The difference is how they achieve it: monetary stimulus – which is controlled by central banks that are, in most markets, independent from the government and able to act quickly – involves manipulating interest rates and the money supply. Fiscal stimulus, on the other hand, includes things like tax cuts and infrastructure spending, and as such is controlled by the government. So if the government in question lacks the support for those spending decisions (looking at you, America) or already has too much debt, it might take longer to have its measures approved than central banks’ monetary stimulus would.

Beyond monetary or fiscal policy, some analysts think it’ll take more coordination between regulators, governments, central banks, and health professionals to get coronavirus – and investors’ nerves – under control. Until then, investors might well continue to remain in a holding pattern.

🎯 Also On Our Radar

Having already shut its Asian theme parks earlier this year, Disney announced it’d close them in the US and Paris this week in response to, you guessed it, the coronavirus pandemic. It’s a reminder to investors that while Disney might see a revenue boost from the increase in subscriptions for its streaming service as more people stay home, that’ll likely be more than offset by the hit to its earnings from shuttered resorts.

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