The central banks are doing their best to help the economies in the current situation


Ambitious measures by the world's central banks strengthen the hope that the world economy can regain its foothold after the Corona crisis.

Central banks around the world are well on their way to ensuring that the coronavirus does not cause a prolonged economic crisis. Over the past few days and weeks, a number of the West's leading central banks have taken extraordinary steps to ensure that the world economy is equipped to take on the shocks caused by the spread of the coronavirus in Europe and the United States.



The US central bank

The US central bank has taken the hardest steps, deciding to lower interest rates by two rounds by a total of 1.5 percentage points, so that the interest rate target now stands at 0.00-0.25%. This is in line with what we saw during the recent crisis of the late '00s. Most recently, the central bank cut interest rates by a full 1 percentage point at one time, unprecedented in modern times. Not even during the 2008-2009 financial crisis did the US central bank made a cut by this size.

At the same time, the US central bank makes two key promises:

  • It will maintain interest rates at this new, low level until it is convinced that the economy in general is back on track.
  • It is ready to use its entire arsenal to keep its hands on the finances and liquidity of the financial system. Therefore, over the coming months, the bank will buy US government bonds for at least $ 500 billion. dollars and at the same time increase its portfolio of US mortgage bonds by at least $ 200 billion. dollars.


This comes on top of the US central bank's decision to give banks more access to liquidity. The US Central Bank, along with the other major Western central banks, has also announced that they are ready to give foreign players access to cheap dollars as well.

“We have had some very turbulent weeks in the financial markets, because investors have been looking for counter-responses from politicians and central banks. The US central bank's decision to cut interest rates and restart government and mortgage bond purchases is a good response, " says Mikael Milhøj, senior analyst, Danske Bank, and he continues:

“The federal government and the US Congress are beginning to realise how serious the current situation is. With the central bank's new approach and hopefully even more help from politicians, the US economy is better equipped to overcome both the short-term challenges, but also to get back on track when hopefully the coronavirus uncertainty soon subsides. "

The UK, Australian, Norwegian and Canadian central banks
The UK central bank has also chosen to ease monetary policy and lower the interest rate by 0.5 percentage points, so that the monetary policy rate is now 0.25 per cent. The Bank of Canada, the Australian central bank and the Norwegian central bank have also lowered the interest rate. The Swedish Riksbank has promised to buy Swedish securities for up to DKK 300 billion.


We’re witnessing a quite predictable pattern: Central banks with positive interest rates and with some ammunition left in the arsenal have lowered interest rates ahead of their ordinary meetings, while central banks with low or even negative rates such as the Japanese and European are more hesitant. 

Mikael Milhøj

Senior analyst, Danske Bank



ECB

Last week, the European Central Bank (ECB) decided not to cut interest rates. Instead, it came up with a number of other measures to help Europe's economy and businesses through the corona crisis.

The deep recession that the corona epidemic and the measures taken against it will trigger would normally be met with a reduction in interest rates, but the circumstances are anything but normal. The ECB's key interest rate is already -0.5 percent, and the effect on the economy of lowering it even futher, for example to minus 0.6 percent, will be largely symbolic. The ECB has repeated many times that it is up to the politicians in Europe to ease fiscal policy in order to boost demand.

Instead, the ECB is accelerating its programs to boost European banks' lending, and hopefully and probably that will help healthy companies stay alive, even though customers flee for a month or two. Not least, the programs will make life a little easier for borrowers in countries like Italy.

The ECB is also accelerating its bond purchases programme, thereby sending more money in circulation. The effect will be somewhat close to an interest rate cut.