The Hong Kong Monetary Authority lowered its base cash rate to a near record-low, after the decision by the US Federal Reserve to cut its rate in a second emergency move this month to try to protect the economy from the coronavirus pandemic.
In addition, the US Federal Reserve said it would buy US$700 billion in Treasury and mortgage-backed securities in a desperate bid to prevent market disruptions triggered by the concerns of a severe economic slowdown from the pandemic. It also struck a deal with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to lower their rates on currency swaps to keep the financial markets functioning normally.
The Federal Reserve’s move was warmly supported by US President Donald Trump.
“It makes me very happy,” Trump said in the White House briefing room. “And I want to congratulate the Federal Reserve.”
“That’s really great for our country,” the US President said. “It’s something that we’re very happy (with), I have to say this, I’m very happy. And they did it in one step, they didn’t do it in four steps over a long period of time. They did it in one step and I think that people in the market should be very thrilled.”
Hong Kong Monetary Authority cut its rate by 64 basis points to 0.86%, whereas the US Federal Reserve slashed its rate on Sunday (local time) to a range of 0 to 0.25%, from a range of 1 to 1.25%, matching its previous record-low. Earlier, the Bank of England made an emergency cut to UK interest rates from 0.75% to 0.25%, equaling the historic low set between August 2016 and November 2017.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Federal Reserve said in a statement. “Global financial conditions have also been significantly affected. Available economic data show that the US economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2%. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.
“The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.”
The People’s Bank of China is also expected to lower its official rate within days to provide financial support for businesses hit by the coronavirus.
Australia’s Reserve Bank cuts its official cash rate to 0.5% at the beginning of the month. Governor of the Reserve Bank of Australia, Philip Lowe, said today in a statement it will announce further policy measures to support the Australian economy on Thursday.
“The Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system. The Bank will also be conducting one-month and three-month repo operations in its daily market operations until further notice to provide liquidity to Australian financial markets. In addition the Bank will conduct longer term repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant. The Reserve Bank and the AOFM (Australian Office of Financial Management) are in close liaison in monitoring market conditions and supporting continued functioning of the market,” said Lowe.
The paralysis of manufacturing in China due to the outbreak of coronavirus in Wuhan, Hubei province, which has spread worldwide, has led to forecasts of a global recession. Italy was the new Hubei epicentre last week with France and Spain vying for the tile this week, with Germany next, then the UK and then the US.
“Developments this week have crushed any remaining hopes of containing COVID-19 to certain regions or to areas within certain regions as new cases of infection accelerate,” said Christian Keller, head of economic research at Barclays Capital in London, in a note to clients on Friday, Forbes reported.
“A global recession for 2020 seems no longer avoidable.”