- Marcus Brookes
- 13 March 2020
- 5 minutes
The virus continues to spread. As the severity of the situation becomes more prevalent, governments and central banks are taking greater steps to combat the health situation as well as the secondary ramifications.
My remit falls within the secondary concerns, specifically the financial world. The arena in which I work faces a combination of challenging factors at the moment: the coronavirus and the oil-price spat.
While solutions are being sought to directly address both problems, I’d like to outline some of the measures that are being taken to address the global financial implications.
Individually, each element has limited capacity to support the financial system and the global economy. But taken together, they can have the desired effect. And make no mistake, a combined international effort is exactly what is required.
The central banks of the US, the UK and the eurozone have all moved to increase the availability of money. The US Federal Reserve and the Bank of England both cut interest rates by 0.5 of a percentage point. Not only is this greater than the usual 0.25 reduction, but the cuts also were implemented ahead of the monthly scheduled meetings. They make borrowing cheaper which can help companies that need to borrow money tide them over until the restrictions applied to reduce contagion, are lifted.
The European Central Bank (ECB) already has ultra-low interest rates, so it turned instead to a different form of stimulus. It is increasing its bond-buying programme by around €15 billion a month. The net effect of this is to pour new cash into the financial system, which also helps to bring borrowing costs down.
Other central banks have taken or pledged to take action as well. The Reserve Bank of Australia led the moves by reducing domestic interest rates, while the Bank of Japan will buy additional bonds to the value of around $4.7 billion.
Staying in Japan, the country’s Economic Revitalisation Minister, Yasutoshi Nishimura, conveyed to a news conference earlier today the importance of a co-ordinated approach by both the country’s central bank and its government. He said that both shared “a strong sense of concern” and would “take bold and unprecedented steps”.
We’ve seen “unprecedented” steps closer to home. Chancellor of the Exchequer, Rishi Sunak, has committed an extra £30 billion to support companies and workers, with the focus on those most financially vulnerable.
The hope now is that the US will join the fray. Congress is set to discuss a stimulus package later today, and the political pressure to push it through will be immense. No one will want to look unhelpful in the face of a crisis in election year. So I’m optimistic that the world’s largest economy will provide the sort of stimulus that the UK has pledged and Japan appears to be promising.
The pressure is now on Germany to participate. Germany’s robust economy is, to all intents and purposes, debt free. By contrast the UK carries structural public debt (money borrowed by the government) to the tune of nearly 80% of annual economic output. I’m hopeful that Germany, the powerhouse of the eurozone economy, will follow the example that other governments are setting.
There is a further tactic that has been adopted to help limit stock price falls. In Spain and Italy, a ban has been imposed on what is referred to as short selling.
What this boils down to is traders putting a bet on share prices going down. The very act puts downward pressure on share prices and can accelerate the speed at which they fall.
Both countries have focused the ban on the companies most vulnerable to the crisis. It might be a little late now that stock prices have fallen so far so fast but, as part of the co-ordinated front, I would not be surprised to see it being applied in other stock markets.
This is a sombre time. Many people have lost more than we can imagine. With that perspective firmly in mind, I am pleased to see a co-ordinated approach developing between central banks and governments of various nations.
Turning to the elements that I can influence or control, I and my colleagues are working hard to monitor external developments, assess the most appropriate actions for portfolio management, and make sensible adjustments where appropriate that balance the short-term pressures and the maintenance of our long-term focus.
Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.
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