How the coronavirus pandemic shows the limitations of central bank powers - Greg Wright

THESE are strange and unsettling days and the global population is crying out for calm and wise leadership.
The new Governor of the Bank of England, Andrew Bailey. Picture: PAThe new Governor of the Bank of England, Andrew Bailey. Picture: PA
The new Governor of the Bank of England, Andrew Bailey. Picture: PA

In the face of the coronavirus pandemic, central banks around the world can help to shore up confidence by singing from the same hymn sheet.

All the signs suggest that central bankers are stepping up to the plate, but this has not led to a widespread steadying of nerves. Far from it.

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The US Federal Reserve and its global counterparts have announced sweeping emergency rate cuts in response to the pandemic that is bringing life to a virtual halt in some parts of the world.

The coordinated response from the Fed to the European Central Bank (ECB) and the Bank of Japan (BOJ) indicates that central bankers are not squeamish about taking decisive action.

The Fed moved first on Sunday, cutting its key rate to near zero in a move which must have brought back memories of the grim days of 2008.

The US decision triggered emergency policy easings by central banks in New Zealand, Japan and South Korea, with Australia also joining with a liquidity injection.

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“The virus is having a profound effect on people across the United States and around the world,” Fed Chair Jerome Powell said in a news conference after cutting short-term rates to a target range of 0% to 0.25%, and announcing at least $700 billion in Treasuries and mortgage-backed securities purchases in coming weeks.

The Reserve Bank of New Zealand slashed rates to a record low as markets in Asia opened for trading this week, while Australia’s central bank pumped extra liquidity into a strained financial system and said it would announce more policy steps on Thursday.

Later, the Bank of Japan also eased policy in an emergency meeting, ramping up purchases of exchange-traded funds (ETFs) and other risky assets to combat the widening economic fallout from the coronavirus epidemic.

South Korea stepped in as well with a 50 basis point rate cut in a rare inter-meeting review on Monday.

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“I don’t think we have reached a limit on how deep we can cut interest rates,” BOJ Governor Haruhiko Kuroda said. “If necessary, we can deepen negative rates further,” he added.

“We can continue to pump ample liquidity into the market.”

The measures did little to calm market nerves because they underlined the scale of a crisis which could go on for months.

“Market reactions to each surprise monetary policy easing have been sell first and ask questions later,” said Selena Ling, head of treasury research and strategy at OCBC Bank in Singapore.

“The more unprecedented measures by the Fed and other central banks, the more investors worry if (they) know something we don’t... fear remains the crux of the problem here as market players remain unconvinced that monetary policy easing and liquidity injections will solve an essentially healthcare crisis.”

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The Bank of England can claim to have been ahead of the game. Last week it launched emergency credit measures to prevent a wave of corporate bankruptcies, and cut interest rates to 0.25% from 0.75%.

But what shots does the Bank have left in its locker? It’s possible that the Bank could cut rates again to zero and expand its purchases of government bonds and corporate debt.

Some have even speculated that the Bank might give newly created money directly to households to help the economy stay afloat.

The pandemic shows the limitations of central Bank powers and how economic forecasting is always fraught with danger.