The announcement of rate cut from several major central banks in the world has pushed policymakers in the European Union (EU) one step further towards stimulus as the coronavirus situation unfolds in Europe.
The U.S. Federal Reserve, in a surprise move, lowered the target range for the federal funds rate by 50 basis points on Tuesday to counter risks posed by the novel coronavirus outbreak. Earlier on Tuesday Australia’s central bank also announced its decision to lower the official interest rate to a record low of 0.50 percent.
The U.S. rate cut came after G7 finance ministers and central bank governors sat for an emergency conference call earlier on Tuesday. They reaffirmed commitment to “use all appropriate policy tools” to achieve growth and safeguard against downside risks given the potential impacts of COVID-19 on global growth.
Even before Tuesday, the rapid development of the coronavirus outbreak in Europe in the past few days had made many analysts believe that stimulus measures will come sooner rather than later.
A majority of EU countries have reported COVID-19 infections, with the total number of confirmed cases standing at around 3,000 by Tuesday, according to the World Health Organization.
Germany, in the past seven days, has seen its number of confirmed cases climbing from just about 20 to nearly 200. In Italy, Europe’s worst affected region, over 2,000 people were diagnosed with COVID-19.
In a statement on Monday, Dutch bank ABN AMRO said it expected an imminent easing of monetary policy by all major central banks, potentially in a coordinated fashion.
Downside risks to the economic outlook have intensified over the last week, given the spread of the coronavirus around the world, analysts from ABN AMRO said.
The global economy is experiencing predominantly a demand shock, where rate cuts can be helpful to cushion the economic fall-out, they said.
That being said, ABN AMRO expected a fresh round of monetary stimulus from the ECB on its next policy meeting in March, including taking the deposit rate further into the negative territory by 10 basis points.
On late Monday, ECB President Christine Lagarde said in a statement that the central bank stands ready to “take appropriate and targeted measures, as necessary and commensurate with the underlying risks,” given the fast developing situation of the coronavirus outbreak worldwide.
“The ECB is closely monitoring developments and their implications for the economy, medium-term inflation and the transmission of our monetary policy,” Lagarde said.
Friedrich Heinemann, an economist from the Leibniz Center for European Economic Research in Mannheim, said expectations regarding the ECB’s interest rate policy have changed abruptly given the COVID-19 outbreak in Europe, “so much so in fact that a further interest rate cutting even deeper into negative territory is no longer being ruled out.”
Heinemann also pointed out the need for the fiscal policymakers to step in. “After the 2009 financial crisis, the coronavirus could become the second textbook case where a coordinated European stimulus package makes sense,” he said in a statement dated Friday.
Fiscal countermeasures should be designed in such a way as to allow rapid assistance to the sectors particularly affected, Heinemann noted. Possible measures may include temporary reduction in VAT rates to stabilize private consumption.
Heinemann’s call for coordination among EU countries was echoed by French Minister of the Economy and Finance Bruno Le Maire, who said on Tuesday that “We want a strong and coordinated response at the level of the euro zone and the G7” after having a telephone conversation with Lagarde.
On Monday, the Organization for Economic Cooperation and Development cut this year’s global growth projection by 0.5 percentage point to 2.4 percent, warning about further downside risks unless governments take actions to limit the spread of the novel coronavirus.