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These 4 policy tools have been used by central banks and organizations to fight the economic fallout from coronavirus
These 4 policy tools have been used by central banks and organizations to fight the economic fallout from coronavirus
Ben WinckMar 5, 2020, 18:49 IST
Reuters/Joshua RobertsJerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.
Governments, central banks, and organizations around the world are utilizing a range of policy tools to pad economies hit by the coronavirus.
The G-7 announced Tuesday it would monitor the outbreak and act appropriately to keep economies from contracting, but its statement didn't name specific actions to be used.
The Federal Reserve quickly responded to questions around the G-7 statement, issuing an emergency rate cut to boost consumer spending.
Here are four policy actions employed against the coronavirus by monetary authorities so far, from rate cuts to flexible relief packages.
Monetary authorities around the world are using every tool at their disposal to protect economies from the escalating coronavirus outbreak.
Experts have already warned of profit stagnation, lagging GDP growth, and global recession as the virus tears into economic activity. Markets tanked through the last week of February on rising concerns of harsh economic fallout, and Treasury bills notched record-low yields as investors piled into less volatile assets.
All eyes are now on central banks and treasuries to insulate economies from declines in consumer spending and dire supply shocks. The G-7 announced on Tuesday it would closely monitor the virus' effects, but the group's statement stopped short of naming specific policy responses. The Federal Reserve issued an emergency rate cut later that day, kicking off easing measures from peer institutions.
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Here are four of the policies being used by central banks and financial authorities to curb virus-driven economic disaster.
Rate adjustments are among the most popular tools available to central banks, as lowering the cost of borrowing for consumers often translates to boosted spending.
Such easing often aids demand stresses more than supply issues, and some experts have warned that the virus's toll on global supply chains can't be solved through rate cuts alone.
While the Fed initially hinted it would keep rates stable through 2020, mounting risks prompted Tuesday's emergency cut, its first since the 2008 financial crisis. The Bank of Canada followed with a smaller cut on Wednesday, making it the second G7 member to ease borrowing costs on rising coronavirus worries.
Long-term repo operations
The Reserve Bank of India is aiming to drive borrowing activity through long-term repo operations over rate cuts, Reuters reported Wednesday. Such actions add new cash to financial systems to stabilize markets and encourage bank lending. One official told Reuters the central bank could add as much as 1 trillion rupees ($13.6 billion) through the repo operations, and that the round of capital injections could start as soon as April.
China utilized similar tools in early February, adding 1.2 trillion yuan ($173 billion) to money markets with bond repurchase agreements. The People's Bank of China also lowered its repo rate to increase lending activity. The central bank activity came as financial markets opened in China for the first time after the extended Lunar New Year holiday.
Anti-epidemic bonds
China's economy has so far suffered the greatest slowdown as the outbreak drove strict quarantine orders, factory shutdowns, and travel bans. The country's state-owned banks are now propping up domestic firms by buying up swaths of coronavirus bonds, The Wall Street Journal reported Wednesday, helping keep companies afloat while revenues sink.
The bonds' proceeds are partially dedicated to coronavirus relief efforts within China, according to The Journal. More than 150 firms have issued their own versions of the bonds since early February, raising more than 237 yuan ($34 billion) for the endangered companies.
State-owned lenders have helped make the cost of borrowing cheaper for those issuing such bonds by buying up large stakes at low interest rates. The activity helps China's government more directly issue liquidity to companies on the verge of default, and while the bonds are marketed as helping fund virus control measures, The Journal reported most issuers are using the funds raised to pay off existing debt.
Relief packages
The International Monetary Fund announced Wednesday a $50 billion aid package for countries' efforts to fight the epidemic. The funding is targeted at low income and emerging-market nations, and $10 billion of the total sum will be available at a zero-percent interest rate, according to a press release.
Eligible countries can tap into the facility immediately and do not need a pre-existing program with the IMF, the organization added.
The relief package will offer flexible stimulus to regions that can't act as quickly as a major economy can, Kristalina Georgieva, managing director for the IMF, said in an interview with CNBC.
"We are in the early stage of engagement, but I can assure you that we will attack very quickly as requests come," Georgieva said. "We would like very much to see them prioritizing, first and foremost, urgently beefing up their health service capacity so that lives are saved and suffering is reduced."
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