Keeping pace with the various forms of response being enacted by policy makers to combat the humanitarian and economic impacts of the Coronavirus (Covid-19) is a challenge. Moves are happening globally day by day. Undaunted by the shifting nature of events, we highlight the key policy initiatives announced to date designed to ensure:
- The continuation of liquidity in global financial markets;
- unimpaired lending facilitation; and
- support for business and households.
Alongside governmental and Central bank responses the medical scientific community is doing a fantastic job investigating potential therapies. We have heard about a new Japanese flu drug enjoying some success. The drug, made by Fujiifilm Toyama Chemical, was approved 6 years ago. A clinical trial for blunting the impact of Covid-19 has yielded positive results in China. While it is too early to claim anything concrete it is good to hear something positive!
The UK’s Response
UK politicians have been put to the test like never before in recent months. Newly appointed Chancellor Rishi Sunak has acted quickly to support the UK economy as the nation moves through the various stages of the virus.
In our opinion Chancellor Sunak has approached the task in the correct way by responding to changing circumstances and giving a commitment to do “whatever it takes” to see the UK through this period.
The announcement which came on Tuesday evening reflected a dramatic escalation in the fiscal response and the main points are distilled below:
- £330 billion of guaranteed loans to business – equivalent to 15% of U.K. GDP;
- £20 billion of tax cuts and grants for businesses this financial year;
- a new lending facility for larger firms, agreed with the Bank of England;
- a three-month mortgage payment holiday for borrowers affected by the virus;
- shops and restaurants will not have to pay business rates this year; and
- requirements for insurers to pay out to companies whose policies cover pandemics.
The enhanced proposal outshone the initial pledge of £30 billion and, at the time of the announcement, represented more than the US is currently spending; a nation 10 times the size of the UK. However, in these extraordinary times the US (referred to below) is announcing new, additional, measures which shows they are now accelerating their response.
Alongside fiscal responses, monetary policy is being deployed. In his final days at the helm, Governor of the Bank of England (BoE) Mark Carney announced a key decision taken by the Monetary Policy Committee (MPC) to reduce the base rate of interest from 0.75% to 0.25%, facilitating lower cost borrowing which complimented a new scheme of low cost funding for banks to help extend bridging loans for small and medium-sized business.
These moves demonstrated tremendous support to assist the efficient function of the financial system but just eight days later the newly appointed Governor of the BoE, Andrew Bailey, has taken this further announcing the decision from the MPC which voted to cut interest rates to 0.10%, the lowest in the Central banks 325-year history. The BoE also pledged to unleash an additional £200 million in quantitative easing to support liquidity in markets taking the total stock of government bonds owned by the BoE from £435 billion to £635 billion.
Europe
The European Central Bank (ECB) are in a different position. Their ability to cut interest rates is limited with rates already in negative territory (-0.50%). However, on Wednesday evening President Christine Lagarde announced an additional €750 billion of bond purchasing, extending their quantitative easing programme that began in 2015. Bond purchasing is now extended to €1.1 trillion with the potential for this amount to be increased further until the ECB judges the crisis phase of the pandemic to be over.
The announcement reinforces commitments from Lagarde that the ECB will do whatever is required to support the union through this situation.
Source: Twitter, March 2020
Lagarde has also called for collaboration between the member states for a large-scale fiscal response via government spending.
Increasing government spending is a delicate matter in European circles and has caused some angst in the EU for some time. For example, Germany have adhered strictly to debt limits imposed by the European Commission whilst Italy has operated a continuous government deficit since the financial crisis of 2008.
Given the gravity of a pandemic European member states are shifting lanes. We expect brake limits on debt will be overruled enabling access to emergency funding to support business and infrastructure spending.
United States
Despite having enormous firepower the US has been criticised for being slow to respond. Relations internationally remain fraught and not supported of late by unhelpful and scurrilous comments from Trump regarding Covid19 being a ‘Chinese’ virus.
However, despite the faltering start a more responsive approach is underway and growing by the day. On Wednesday, the US unveiled a $1.3 trillion package providing support for household, business and the financial system.
Proposed fiscal measures include:
- $500 billion in direct payments to Americans linked to income and number of children in the household;
- $50 billion in loans to the distressed airline sector; and
- $150 billion to “severely distressed sectors” of the economy from the virus outbreak.
On the monetary side Governor of the Federal Reserve (Fed) Jerome Powell has been more proactive, enacting two interest rate cuts which collectively take the base rate of interest from 1.75% to 0.25%. The Fed also increased their quantitative easing programme through a pledge to repurchase an additional $700 billion of government bonds and encouraged banks to use the Federal Reserve’s “discount window”, which facilitates liquidity by providing short term loans to banks.
Whilst the measures are impressive the proposals must be passed by the House of Representatives in an already tense election year. However, neither Democrats or Republicans want to be seen as blocking the path of a bill designed to alleviate economic hardship fearing a reaction from the ballot box.
China
China are at the most advanced stage of the virus. Their efforts to contain the virus appear to have been successful, demonstrated by a rapid decline in the number of active cases in the chart below. Additionally, higher readings of pollution levels and energy consumption suggest factories are returning to work. The true cost of the shut-down is yet to be realised but for the two months for which data is available it looks like the economy contracted by 13% in January and February.
Along the way the Peoples Bank of China have provided support by cutting interest rates, injecting 400 billion RMB ($57 billion) into the banking system through the repurchase of government bonds and freeing up $79 billion for lending by enabling banks to operate with lower reserve levels supportive of business, households and supply chains.
Chart: Active and Recovered Coronavirus Cases in China
Source: Bloomberg, March 2020
Conclusions
Global efforts have been significant with ramping up of fiscal and monetary support.
We can take some comfort in knowing key decision makers of the world are fully committed to supporting their economies and their citizens through this challenging situation.
Chart: Central Banks across the world who have cut interest rates in 2020
Source: Bloomberg, March 2020
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