Virus ‘wildcard’ threatens to drag central banks into action

Bloomberg

Global central bankers are biding their time as the coronavirus fallout reverberates through the world economy, which they had hoped was stabilising after its worst year since the financial turmoil of 2009.
While yet to respond with major stimulus, monetary policy makers across the globe have expressed concern and signalled a willingness to act if the virus delivers a sustained triple blow to demand, inflation and financial markets.
Bank of Japan Governor Haruhiko Kuroda said he wouldn’t hesitate to shield his economy. Australia, the developed economy most exposed to China, said it’s still prepared to lower rates if needed, while stressing that it’s important not to “catastrophise.”
On Wednesday — just before the Bank of Thailand cut its key rate and the Philippine central bank governor hinted a similar move was imminent — the Monetary Authority of Singapore said there was “sufficient room” for its currency to ease if coronavirus weakens the economy. At the US Federal Reserve, Vice Chairman Richard Clarida last week described the impact of the virus as an economic “wild card.”
The economic pain is playing out in real time. Nike Inc became the latest company to warn of a hit, saying it had closed about half of its company-owned stores in China as a result of the outbreak, which it expects to have a “material impact” on its operations in the country. World Bank President David Malpass warned of an enormous amount of uncertainty.
The upshot is that after racing to the rescue of swooning economies in 2019, central bankers are again having to assess a fresh downside risk to their outlook and a new disinflationary impulse. Their hope is that the virus will soon be contained, enabling a swift bounce back in global growth, without them having to ease already loose monetary policy even further.
“Typically, what’s happened in the past, there may be a short-term impact of an epidemic or a pandemic, but longer term it seems to have relatively little influence, and I think many
observers are hoping that will be true this time,” former Fed Chair Janet Yellen said in Washington. “But we don’t know where this is going, and to my mind it is clearly a source of uncertainty and risk to the global outlook.”
A dilemma for central banks is that their key rates are already at or near historical lows.
Bloomberg Economics estimates show that benchmarks across major advanced economies are already back below neutral, the rate that balances full employment and low inflation.
That may leave central banks reluctant to cut for fear of using up ammunition they might need to fight a future downturn. But they also could choose to cut in hopes of warding off a renewed economic downturn.
The SARS experience 17 years ago may offer reason not to panic. According to James McCormick, a strategist at Natwest Markets, the 2003 “impact on growth and markets was short-lived and once it had passed, the global economy resumed its solid uptrend into the end of year.”
Less confident is Erik Nielsen, group chief economist at UniCredit Bank, who had already been among the few economists to predict the Fed would cut rates this year before the virus hit the headlines.
“If the outbreak does not dissipate soon, the authorities in both China and elsewhere are likely to extend travel bans, people will stay at home, and the increase in uncertainty will cause consumers to delay consumption and firms to defer investment,” said Nielsen. “In other words, we think it’s way too early to dismiss this outbreak as just a brief interruption of constructive markets — as much as we wish it is.”
The Fed’s Clarida stressed that it was too soon to take a firm view on the spillovers to the U.S., while making clear that the country could absorb a temporary stutter.
“If this were to result in, say, a one or two-quarter slowdown in growth, that’s probably not something that changes the big picture,” he said Friday in an interview on Bloomberg Television. “But I do agree it’s a challenging situation. We’re going to keep on top of it.”
The Fed kept rates steady last week after cutting three times in 2019 and signaling it would probably keep policy on hold through this year. Investors have responded to the virus’s spread by increasing bets that officials would cut rates in 2020, according to federal funds futures contracts, though they still only fully price one quarter-point cut.
“The odds of Fed cuts are surely going up, and cuts will happen if the consequences of the virus prove large enough,” said Roberto Perli, a partner at Cornerstone Macro LLC and a former Fed economist. His view is that if the Fed does cut, it will do so by more than the traditional 25 basis points.
“The idea of cuts is not far fetched at all — the bar for cutting rates was previously fairly high, but the coronavirus is bringing it down significantly,” Perli said.
European Central Bank Vice President Luis de Guindos said this week that it’s too early to jump to conclusions. “We are in the first stage of this outbreak and know very little about the characteristics of the virus so far,” he told Greek television station ERT.
Bank of England Mark Carney described it last week as a “fast-moving issue.”
“I don’t want to speculate in terms of orders of magnitude of impact on global activity, and blow-back to the U.K., but it’s something we will be looking at very closely,” he said.
Reserve Bank of Australia Governor Philip Lowe on Wednesday said the 2003 SARS outbreak, which hammered activity but led to a quick recovery, could be a template.
“It is important we don’t catastrophize here, it’s possible this does not work out well, but it is also possible that the SARS experience is a reasonable guide to what happens,” he told reporters after a speech.
China’s central bank took its first concrete steps to cushion the economy and plunging markets this week, providing short-term funding to banks and cutting the interest rate it charges for the money. More measures may come in the weeks ahead, with much hinging on how quickly authorities can contain the virus.
Some authorities have little choice but to move.
Thailand, whose economy is vulnerable to slump in Chinese tourists, cut rates on Wednesday, while Philippine central bank Governor Benjamin Diokno said it would be better to cut interest rates sooner than wait.
“This remains for now a tail risk and a wildcard,” said Ben Emons, managing director of macro strategy at Medley Global Advisors. “But central banks will not lag in their response.”

Thailand cuts interest rate as virus outbreak hurts economy
Bloomberg

The Bank of Thailand cut its benchmark interest rate to a record low as the coronavirus outbreak, a stalled government budget and bad drought imperil economic growth.
The central bank lowered the policy rate by 25 basis points to 1% on Wednesday in a unanimous decision, the third cut in its last five meetings. Fourteen of 29 analysts in a Bloomberg survey predicted the decision, with the rest expecting no change.
“They have come to terms with a continued slowdown this year. That’s mainly coming from the virus downing tourism,” said Prakash Sakpal, an economist at ING Groep NV in Singapore who expects one more rate cut this year. “There’s not much scope for fiscal stimulus, as the budget hasn’t even passed just yet. All the burden is on the Bank of Thailand.”
The baht weakened by as much as 0.9% against the dollar to 31.264, before trading 0.5% lower at 31.129 per dollar as of 2:53 pm in Bangkok. The country’s benchmark stock index erased earlier gains to trade little changed on the day.
The virus has delivered a severe blow to Thailand’s tourism industry, undermining the outlook for the economy. Officials already were grappling with the worst drought in four decades, a prolonged delay in the implementation of the 3.2-trillion-baht ($103 billion) annual budget and shrinking exports.
“The outbreak may be temporary, but it’s a huge shock to the economy,” said Naris Sathapholdeja, chief economist at TMB Bank Pcl in Bangkok. “Cutting borrowing costs helps to alleviate the pressure on the private sector.”
Bank of Thailand Assistant Governor Titanun Mallikamas told reporters the baht is likely to remain volatile going forward. Even after falling 3.6% this year — making it the worst performer among Asian currencies — he said the baht may still be out of line with economic fundamentals after last year’s rapid rise.
The monetary policy committee said Thailand’s economy — expected to grow 2.8% this year — “would expand at a much lower rate in 2020 than the previous forecast.” Inflation this year and next “was projected to be below the lower bound” of the target, set at 1%-3%. The bank is likely to revise the economic growth forecast at its next meeting, Titanun said.
Data earlier Wednesday showed Thai consumer confidence falling for an eleventh straight month in January — even before the coronavirus scare had much time to impact the economy.
Running Low
Wednesday’s cut may have been the only available option for policy makers, but it risks leaving the Bank of Thailand without any ammunition, said Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo. He expects the central bank to stay on hold for the rest of 2020.
“The direct impact on the economy from the rate cut, as well as the benefit from the weaker baht from the rate reduction, will be questionable, as external demand may remain weak and the spread of coronavirus will keep the tourism sector sluggish,” he said.
The government said last week it will consider new initiatives to support the economy. The ruling coalition has announced more than $10 billion of stimulus steps over the past few months.
Titanun said the coronavirus outbreak will substantially hurt Thailand’s economy in the first half of the year, and easing monetary policy is intended to boost liquidity and support households and businesses to restructure debt. Microprudential and macroprudential measures could be used at appropriate times, he said.
“The key for now is liquidity injection and debt restructuring. We have to make sure it really happens and quickly,” Titanun said. “The interest rate is just a supportive factor.”