Central bank watcher: Coronavirus sparks new wave of easing

Central bank watcher: Coronavirus sparks new wave of easing

09-03-2020 | Vision

The global spread of the coronavirus has forced policymakers as well as investors to reassess their outlook. To counter the fresh downside risks, central banks have started a new wave of easing.

  • Rikkert  Scholten
    Portfolio Manager
  • Martin van Vliet
    van Vliet
  • Bob Stoutjesdijk

Speed read

  • The US Federal Reserve heads back to the zero lower bound
  • ECB keeps its policy “appropriate and targeted”
  • The PBoC likely to double down on easing

We agree with markets that the Fed’s intermeeting rate cut has opened the door for a move back towards the zero lower bound. In the Eurozone the ECB may be compelled to do more than offering indirect liquidity support to businesses, which is the move being contemplated by the BoJ. Indeed, we believe a rate cut and a temporary increase in the pace of net QE is becoming more likely by the day. Finally, in China, the PBoC is on a measured, targeted easing path. We believe that the focus of the PBoC will gradually shift from providing liquidity to using the interest rate channel, as Fed easing and forthcoming inflation falls pave the way for further cuts.

With the rapid moves of the past weeks, our scenarios for central bank easing are now fully priced in, except in China.

Maintenant, suivez-nous aussi sur Instagram
Maintenant, suivez-nous aussi sur Instagram
Source: Bloomberg, Robeco, change 12m ahead, based on money market futures and forwards

An intermeeting cut is usually followed by more

There are a couple of aspects to the Fed’s intermeeting rate cut of 3 March which might help explain their thinking and point to possible next steps. First, with official rates already close to zero, the Fed has less ammunition to support the economy once it moves into a recession. This flags the importance of preventing the economy from getting to that point, and hence the Fed’s desire to move early.

Second, the Fed’s communication to markets over the past year has been far from effective. In 2018-2019 the Fed acted late to signs of overtightening and was heavily criticized for this. The FOMC probably felt forced by the market to ease in 2019, making it more difficult to surprise in a dovish way, which in turn reduced the effectiveness of its actions. So, it would have taken that into account.

And 2020 is special. Although the Fed is independent, it probably would not want to be accused of acting too slowly in a possible health crisis. Nor would it want to feel forced to act at the meetings surrounding the Presidential elections on 3 November. By making an early move, they are back ahead of the curve and can avoid possible awkward timing.

Fourth, by moving quickly the Fed made it easier for other central banks to pursue an easier policy, without the risk of being labeled a ‘currency manipulator’. Ultimately, monetary easing elsewhere will also support the US economy. Intermeeting cuts are not unique. Between 1998 and 2008 this happened seven times (including one discount rate cut in August 2007). All of these intermeeting cuts were followed by additional easing.

ECB keeps its policy “appropriate and targeted”

Taking into account the Fed’s 50bps emergency cut and recent price action in European bond markets, we feel the ECB will be forced to do more than ‘merely’ announcing indirect liquidity support to businesses. Indeed, they will likely complement this with a 10bps cut in the deposit facility rate, which is fully priced in by April, and with a temporary increase in the monthly pace of net asset purchases, notably those of corporate bonds.

We think any step-up in the pace of net QE will be measured and temporary – conditional on the evolution of downside risks emanating from the virus outbreak.

The PBoC likely to double down on easing

The initial response of Chinese policymakers to the economic harm caused by the coronavirus outbreak seems to have been aimed at supporting cash-constrained SMEs, via fiscal-type measures such as targeted tax and cost cuts, and targeted liquidity and credit support. More recently, with the outbreak seemingly moving in the right direction, the focus of authorities seems to be shifting to stimulating demand, especially through infrastructure investment.

Looking ahead, it seems reasonable to assume another 10bps cut in both the 7-day repo and 1-year MLF rate later this month. The emergency 50bps rate cut by the Fed – and recent strengthening of the CNY – arguably has given the PBoC more scope to do so. On top of this, we have penciled in another 10bps of rate easing in our central scenario for H1. Besides this we expect another 50-100bps cut in (small) banks’ reserve requirement ratio (RRR). Since we see a real possibility – given the virus outbreak outside of China – that the recovery in China could be slow to unfold, the risks around this baseline scenario seems to be skewed to even more rate cuts. These, however, could be more slowly delivered than is typically done by central banks in developed markets.

The BoJ has limited remaining policy options

With interest rates already quite low, and given that the authorities recognize that the coronavirus is creating a supply shock with near-term consequences at the very least, we expect that the Japanese government and the BoJ would consider fiscal policy measures to be more effective than monetary policy measures.

That said, our view at this point is that the BoJ is likely to maintain its preference to keep the short-term policy rate from moving deeper into negative territory – barring any sharp yen appreciation.

Download the Central Bank Watcher
With our latest analysis of global monetary policy.

Information importante

L’information publiée dans les pages de ce site internet est plus particulièrement destinée aux investisseurs professionnels.

Certains fonds mentionnés dans le site peuvent ne pas être autorisés à la commercialisation en France par l’Autorité des Marchés Financiers. Les informations ou opinions exprimées dans les pages de ce site internet ne représentent pas une sollicitation, une offre ou une recommandation à l’achat ou à la vente de titres ou produits financiers. Elles n’ont pas pour objectif d’inciter à des transactions ou de fournir des conseils ou service en investissement. Avant tout investissement dans un produit Robeco, il est nécessaire d’avoir lu au préalable les documents légaux tels que le document d’information clé pour l’investisseur (DICI), le prospectus complet, les rapports annuels et semi-annuels, qui sont disponibles sur ce site internet ou qui peuvent être obtenus gratuitement, sur simple demande auprès de Robeco France.

Nous vous remercions de confirmer que vous êtes un investisseur professionnel et que vous avez lu, compris et accepté les conditions d’utilisation de ce site internet.

Je n’accepte pas