Central Banks respond to the economic risks caused by the spread of the Coronavirus

Following the spread of the Coronavirus, Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows. The Bank of England voted unanimously to reduce the Bank Rate by 50 basis points to 0.25% on 10 March 2020 in order to help UK businesses and households manage through the economic shock caused by the spread of the Coronavirus.

Commenting on the interest rate decision by the Bank of England’s Monetary Policy Committee, Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said: “With the MPC close to exhausting the monetary policy tools available to them, the government must do more to support business confidence and incentivise investment, particularly by tackling the rising input costs faced by businesses.”

After interest rate were cut by the Bank of England and the Federal Reserve (FED) in response to the spread of the Coronavirus, the European Central Bank (ECB) announced on 12 March 2020 that the ECB will leave interest rates unchanged at -0.5% and expand stimulus measures to meet the risks caused by the Coronavirus. Bank’s balance sheets are constrained in Europe after a decade of unconventional monetary policy and European policymakers are worried that if they keep rates low for too long, it may prove harmful to households in the future. The fear is that negative rates may push households to alternative forms of storing cash.

Christine Lagarde, President of the ECB, said during the press conference this week that the latest economic indicators suggest a considerable worsening of the near-term growth outlook. The Coronavirus primarily constitutes a negative supply shock that will reduce growth and increase costs for which monetary policy is an ineffective tool. Moreover, the Coronavirus is likely to cause rapid shifts in consumption with lower demand in tourism and other service sectors. The Coronavirus outbreak will in particular slow down production as a result of disruptions in supply chains, which will negatively impact the global economy. Going forward, an ambitious and coordinated policy action is needed to meet the heightened market volatility and reduction in foreign and domestic demand caused by the spread of the Coronavirus.

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