Central Banks Cut Rates Amid Growing Panic

Marius Paun | London, UK | Senior dealer | Friday, 28th February 2020

China’s economy was hit rather hard from the coronavirus outbreak which came on top of the Lunar New Year holiday. Data releases, which started over last weekend, showed official Manufacturing PMI at 35.7 vs expectation for 45. Services PMI came in even worse, at 29.6 vs expectations of 51 with both figures setting off alarm bells in world markets.

In the US, the S&P 500 posted a sharp rebound of nearly 5% on Monday from the sell-off we had seen last week, as markets grew increasingly confident the Fed will step in and provide support amid the widespread panic. On cue, on Tuesday, the Federal Open Market Committee decided unanimously to cut rates by 50 basis points from 1.75% to 1.25%. It was an emergency move, the first since 2008, and was done in spite of strong economic fundamentals (as per Fed’s statement).

On Friday, non-farm payrolls report showed the US economy added 273,000 jobs in February, surpassing estimates of 175,000 new payrolls. However, the Dow Jones opened lower, losing more than 700 points at the time of writing and is on course of giving up all the rebound done early in the week. Some analysts have pointed out that because both supply and demand have been hit by the outbreak, it makes it particularly tricky to deal with.

In the UK, markets have started to price in a rate cut as well, by the Bank of England at its next meeting on March 26th. It seems the debate now is not if the BOE will cut, but by how much.

Pre-empting the US Fed move, the Reserve Bank of Australia announced a 0.25% interest rate cut to a record low of 0.5%. It added that it took the decision as a response to coronavirus which is expected to ‘delay progress on jobs and inflation’.

Also mirroring the US Fed, Bank of Canada slashed rates by 50 basis points, with markets anticipating, by-and-large, only 25basis points cut. The central bank stated that ‘business activity in some regions has fallen sharply and supply chains have been disrupted’.

The European Central Bank also held an unscheduled meeting late Tuesday to assess the impact of the coronavirus, although there was no decision taken on interest rates. The reason they stayed in wait-and-see mode might have been because their benchmark is already at zero. In addition, the next ECB meeting will be on March 12th, less than a week away.

The price of US Oil continued its nosedive, trading around $43 per barrel on Friday afternoon, after starting the year at over $61. Apparently this was caused by Russia rejecting OPEC’s proposal for an additional 1.5 million barrels per day output reduction, at their recent meeting in Vienna.