The spread of Covid-19 and the measures
being taken to contain the virus will result in an economic shock that
could be sharp and large, but should be temporary. The role of the Bank
of England is to help to meet the needs of UK businesses and households
in dealing with the associated economic disruption.
On 11 March, the Bank of England’s three
policy committees announced a package of measures to support UK
businesses and households through this period. In his Budget on the
same day, the Chancellor of the Exchequer announced a number of fiscal
measures with the same aim. On 17 March, this combined package of
measures was complemented by the announcement by HM Treasury of the
Covid 19 Corporate Financing Facility (CCFF), for which the Bank will
act as HM Treasury’s agent. By purchasing commercial paper, the CCFF
will provide funding to non-financial businesses making a material
contribution to the UK economy to support them in paying salaries, rents
and suppliers while experiencing the likely disruption to cashflows
associated with Covid-19.
In light of actions to tackle the spread of the virus, and evidence relating to the global and domestic economy and financial markets, the Monetary Policy Committee (MPC) held an additional special meeting on 19 March. Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, UK and global financial conditions have tightened.
At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives. It therefore voted unanimously to increase the Bank of England’s holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves, and to reduce Bank Rate by 15 basis points to 0.1%. The Committee also voted unanimously that the Bank of England should enlarge the TFSME scheme, financed by the issuance of central bank reserves.
The majority of additional asset purchases
will comprise UK government bonds. The purchases announced today will
be completed as soon as is operationally possible, consistent with
improved market functioning. The Bank will issue further guidance to
the market in due course.
The next regularly scheduled MPC meeting
will end on 25 March, with the minutes published on 26 March. The
minutes of today’s special meeting will be released at the same time.
RBA said: The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within countries and within cities. The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.
Financial market volatility has been very high. Equity prices have experienced large declines.
Government bond yields have declined to historic lows. However, the functioning of major government bond
markets has been impaired, which has disrupted other markets given their important role as a financial
benchmark. Funding markets are open to only the highest quality borrowers.
The primary response to the virus is to manage the health of the population, but other arms of policy,
including monetary and fiscal policy, play an important role in reducing the economic and financial
disruption resulting from the virus.
At some point, the virus will be contained and the Australian economy will recover. In the interim, a
priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis
recedes, the country is well placed to recover strongly.
At a meeting yesterday, the Reserve Bank Board agreed to the following comprehensive package to support
the Australian economy through this challenging period:
A reduction in the cash rate target to 0.25 per cent.
The Board will not increase the cash rate target until progress is being made towards full employment
and it is confident that inflation will be sustainably within the 2–3 per cent target
band.
A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.
This will be achieved through purchases of Government bonds in the secondary market. Purchases of
Government bonds and semi-government securities across the yield curve will be conducted to help
achieve this target as well as to address market dislocations. These purchases will commence tomorrow.
The Bank will work closely with the Australian Office of Financial Management (AOFM) and state
government borrowing authorities to ensure the efficacy of its actions. Further details about the
implementation of this are provided in the accompanying notice.
A term funding facility for the banking system, with particular support for credit to small and
medium-sized businesses.
The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions
(ADIs) at a fixed rate of 0.25 per cent. ADIs will be able to obtain initial funding of up to
3 per cent of their existing outstanding credit. They will have access to additional funding
if they increase lending to business, especially to small and medium-sized businesses. This facility is
for at least $90 billion. Further details are available in the accompanying notice.
The Australian Government has also developed a complementary program of support for the non-bank
financial sector, small lenders and the securitisation market, which will be implemented by the
AOFM.
Exchange settlement balances at the Reserve Bank will be remunerated at 10 basis points, rather
than zero as would have been the case under the previous arrangements.
This will mitigate the cost to the banking system associated with the large increase in banks’
settlement balances at the Reserve Bank that will occur following these policy actions.
The Reserve Bank will also continue to provide liquidity to Australian financial markets by
conducting one-month and three-month repo operations in its daily market operations until further
notice. In addition, the Bank will conduct longer-term repo operations of six-month maturity or longer
at least weekly, as long as market conditions warrant.
The various elements of this package reinforce one another and will help to lower funding costs
across the economy and support the provision of credit, especially to small and medium-sized
businesses.
Australia’s financial system is resilient and well placed to deal with the effects of the
coronavirus. The banking system is well capitalised and is in a strong liquidity position. Substantial
financial buffers are available to be drawn down if required to support the economy. The Reserve Bank is
working closely with the other financial regulators and the Australian Government to help ensure that
Australia’s financial markets continue to operate effectively and that credit is available to
households and businesses.
Today’s policy package from the Reserve Bank complements the welcome fiscal response from
governments in Australia. Together, these measures will support jobs, incomes and businesses through
this difficult period and they will also assist the Australian economy in the recovery.
Welcome to our latest post covering finance and property news with a distinctively Australian flavour. Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…
March Live Q&A: https://youtu.be/Vh2AkFwg7z0
Digital Finance Analytics (DFA) Blog
Shock And Awe - The Property Imperative Daily 16 March 2020 [Podcast]
Welcome to our latest post covering finance and property news with a distinctively Australian flavour. Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…
As Australia’s financial system adjusts to the coronavirus (COVID-19), financial
regulators and the Australian Government are working closely together to help ensure
that Australia’s financial markets continue to operate effectively and that credit
is available to households and businesses. (Refer to earlier Council of Financial Regulators’ (CFR)
press release.)
Australia’s financial system is resilient and it is well placed to deal with the
effects of the coronavirus. At the same time, trading liquidity has deteriorated in some
markets.
In response, 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 are in close liaison in
monitoring market conditions and supporting continued functioning of the market.
The Bank will announce further policy measures to support the Australian economy on Thursday.
DFA is expecting a 0.25% rate cut, and formal QE to go alongside the repo operations already in train.
In addition the Federal Reserve on Sunday announced it would purchases $700 billion in bonds and securities to stabilize financial markets and support the economy.
The emergency rate cut and push to flood the Treasury bond market with liquidity comes as the coronavirus pandemic forces businesses across the U.S. and world to shutter, likely plunging the global economy into a recession.
The Bank of Canada, the Bank of England,
the Bank of Japan, the European Central Bank, the Federal Reserve, and
the Swiss National Bank are today announcing a coordinated action to
enhance the provision of liquidity via the standing U.S. dollar
liquidity swap line arrangements.
These central banks have agreed to lower
the pricing on the standing U.S. dollar liquidity swap arrangements by
25 basis points, so that the new rate will be the U.S. dollar overnight
index swap (OIS) rate plus 25 basis points. To increase the swap lines’
effectiveness in providing term liquidity, the foreign central banks
with regular U.S. dollar liquidity operations have also agreed to begin
offering U.S. dollars weekly in each jurisdiction with an 84-day
maturity, in addition to the 1-week maturity operations currently
offered. These changes will take effect with the next scheduled
operations during the week of March 16.1
The new pricing and maturity offerings will remain in place as long as
appropriate to support the smooth functioning of U.S. dollar funding
markets.
The swap lines are available standing
facilities and serve as an important liquidity backstop to ease strains
in global funding markets, thereby helping to mitigate the effects of
such strains on the supply of credit to households and businesses, both
domestically and abroad.
The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. 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 percent. 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.
Voting for the monetary policy action were
Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W.
Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S.
Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action
was Loretta J. Mester, who was fully supportive of all of the actions
taken to promote the smooth functioning of markets and the flow of
credit to households and businesses but preferred to reduce the target
range for the federal funds rate to 1/2 to 3/4 percent at this meeting.
In a related set of actions to support the
credit needs of households and businesses, the Federal Reserve
announced measures related to the discount window, intraday credit, bank
capital and liquidity buffers, reserve requirements, and—in
coordination with other central banks—the U.S. dollar liquidity swap
line arrangements. More information can be found on the Federal Reserve
Board’s website.
In a statement, the Reserve Bank of New Zealand says New Zealand’s financial system is sound, with strong capital and liquidity buffers, but faces significant uncertainties from the impacts of COVID-19. The Reserve Bank is announcing additional measures to support the provision of credit and market functioning.
Reserve Bank Deputy Governor
Geoff Bascand says the situation around COVID-19 is evolving rapidly, and there
is much uncertainty.
“To support credit
availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months –
to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will
consider whether further delays are necessary.”
“We are taking this action
now to help support lending in the economy at time when there is a lot of
uncertainty. The Reserve Bank’s expectation is that banks will utilise this
flexibility to maintain lending to households and businesses. Banks have
significant buffers above current regulatory minimums, and we encourage them to
use them,” Mr Bascand said.
“Deferring the capital
framework implementation provides banks with significant capital headroom. We
estimate that this headroom will enable banks to supply up to around $47
billion more lending than would have been the case, had the decisions been
implemented as planned.”
Mr Bascand said the Reserve
Bank is currently identifying other regulatory initiatives that can be deferred,
to reduce the burden on financial institutions at this time of uncertainty.
These will be announced in coming days. The Reserve Bank is working closely
with the Council of Financial Regulators and international regulators.
Assistant Governor Christian
Hawkesby said the Bank is also ensuring there is sufficient liquidity in the
financial system, through regular market operations.
“The Bank has a number of
operational tools at its disposal to support liquidity and market functioning
in New Zealand. This has helped the domestic cash market and foreign exchange
swap market to continue to function effectively over recent weeks,” Mr Hawkesby
says.
“Banks currently have robust
liquidity and funding positions and can manage short-term disruptions to
offshore funding markets. We will continue to monitor developments closely and
engage regularly with market participants to ensure we are ready to provide
support if needed.”
The Reserve Bank also
announced the following changes to the pricing of its standing facilities and
ESAS accounts, in part to assist cash market functioning at a lower OCR:
Cash that ESAS account holders have on deposit at the Reserve Bank that is in excess of their allocated ESAS credit tier will be remunerated at the OCR less 25 basis points (from OCR less 75 basis points).
Bonds lent through the Bond Lending Facility well be lent at the OCR less 50 basis points (from OCR less 75 basis points).
A maximum rate will be set for bonds lent through the Repo Facility at the OCR less 50 basis points (from OCR less 75 basis points).
Cash will continue to be lent via the Overnight Reverse Repo Facility at the OCR plus 25 basis points until further notice.
The Reserve Bank has a
number of tools to provide additional liquidity, and support to market
functioning, should these be required in the future:
The ability to provide term funding through a Term Auction Facility (TAF) which can provide collateralised loans out to 12 months. This facility was previously provided from 2008 to 2010.
The Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
The ability to provide liquidity to the NZ government bond market to support market functioning.
Mr Hawkesby says the Reserve
Bank continues to monitor developments, and is ready to act to ensure markets
and the financial system operate in a stable and efficient manner.
The Reserve Bank New Zealand announced today that following an emergency meeting yesterday, the Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months. The also signalled the likelihood of QE to follow.
The negative economic
implications of the COVID-19 virus continue to rise warranting further monetary
stimulus.
Since the outbreak of the
virus, global trade, travel, and business and consumer spending have been
curtailed significantly. Increasingly, governments internationally have imposed
a variety of restraints on people movement within and across national borders
in order to mitigate the virus transmission.
Financial market pricing has
responded to these events with declining global equity prices and increased
interest rate spreads on traditionally riskier asset classes.
The negative impact on the
New Zealand economy is, and will continue to be, significant. Demand for New
Zealand’s goods and services will be constrained, as will domestic production.
Spending and investment will be subdued for an extended period while the
responses to the COVID-19 virus evolve.
Several factors will
continue to assist and support economic activity in New Zealand.
New Zealand’s financial
system remains sound and our major financial institutions are well capitalised
and liquid. The Reserve Bank is also ensuring that the banking system continues
to function normally.
The Government is operating
an expansionary fiscal policy and has imminent intentions to increase its
support with a fiscal package to provide both targeted and broad-based economic
stimulus.
The New Zealand dollar
exchange rate has also depreciated against our trading partners acting as a
partial buffer for export earnings.
And, the Monetary Policy
Committee agreed to provide further support with the OCR now at 0.25 percent.
The Committee agreed unanimously to keep the OCR at this level for at least 12
months.
The Committee also agreed that should further stimulus be required, a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.
The members discussed the broad range of Official Cash Rate (OCR)
settings that would be suitable. Staff briefed the Committee on the scale of
policy stimulus required given deteriorating global conditions and the impact
of travel restrictions. The Committee discussed the relative contributions of
planned fiscal and financial stability measures in consideration of the
monetary policy response. Staff also advised that an OCR of 0.25 percent was
currently the lower limit, given the operational readiness of the financial
system for very low or negative interest rates.
Subsequent Committee
discussion focused on two scenarios:
a 0.5 percentage point cut in the OCR to 0.5 percent, followed by an assessment of the rapidly developing COVID-19 situation, with the ability to follow up with more stimulus as needed at the scheduled March OCR review
A 0.75 percentage point reduction in the OCR to 0.25 percent.
Members noted that lower
interest rates would likely support the soundness of the financial system – in
the context of the Committee’s Remit.
Given views on the required
level of stimulus given the economic impact of COVID-19, the committee agreed a
0.75 percentage point reduction in the OCR would be a more suitable option.
