Central Banks Curb Vaccine Euphoria With Notice of Economic Pain

(Bloomberg) -- Some of the world’s top central bankers have warned the global economy will still need support this year and next to weather the coronavirus crisis even if a successful vaccine is found.

In remarks that contrast with the euphoria in financial markets since Pfizer Inc. and BioNTech SE announced “extraordinary” results for their experimental vaccine, policy makers said the near-term outlook will remain dominated by rising infections and new lockdowns.

“While the latest news on a vaccine looks encouraging, we could still face recurring cycles of accelerating viral spread and tightening restrictions until widespread immunity is achieved,” European Central Bank President Christine Lagarde said Wednesday.

The ECB chief’s response echoed monetary officials from the New Zealand to Sweden and the U.S. Robert Kaplan, who heads the Federal Reserve Bank of Dallas, warned that the world’s biggest economy faces a challenging six months trying to stem a surge in infections.

“We’re still in the teeth of the pandemic,” he said Tuesday. “We’re going to be in the teeth of it in the fourth quarter, at least the first quarter, and there will still be social distancing and all the protocols through a good part of 2021.”

Stocks soared around the world and bonds declined after Pfizer and BioNTech’s interim analysis showed their vaccine prevented more than 90% of Covid-19 infections, the most encouraging scientific advance so far. The results still need to be cleared by the U.S. Food and Drug Administration.

The governor of Sweden’s Riksbank, Stefan Ingves, said it’s extremely difficult to assess how long the recovery from the pandemic will take even after that encouraging news.

“We humans want to be optimistic,” he said in an interview in Stockholm. “So far, however, it has taken a very long time, longer than many had expected” to fight the virus.

What Bloomberg Economics Says...

“Ahead of widespread distribution of a vaccine we anticipate activity will continue to bump along some way below pre-Covid levels. The experience of multiple countries over the last few months has shown economic activity and virus cases trapped in a rinse-repeat cycle.”

-- Bjorn van Roye and Tom Orlik

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The pandemic has killed more than 1.2 million people around the world since late January and sent the global economy into the worst recession in living memory.

Central banks responded by cutting interest rates and buying trillions of dollars in bonds, pushing borrowing costs to record lows. That allowed governments to unleash some $12 trillion of support, according to International Monetary Fund estimates.

The Reserve Bank of New Zealand delivered extra stimulus on Wednesday even as it gave a less pessimistic view of the economy. It said the road ahead remains largely reliant on containing the virus, and signaled it’s ready to do more to help the economy if needed.

Stimulus Debate

Still, the impact of positive vaccine news will be “core to the policy debate globally,” Krishna Guha and Ernie Tedeschi of Evercore ISI, a New York-based investment bank, said in a report to clients.

The possibility of a vaccine being developed as early as this year is already complicating tense talks on a second round of fiscal stimulus in the U.S. Senate Majority Leader Mitch McConnell, a Republican, said “targeted” relief should be sufficient.

Klaas Knot, an ECB policy maker who heads the Dutch central bank, said a vaccine discovery and a smooth distribution could at least reduce uncertainty.

“It would allow us to have an end point. That would be light at the end of the tunnel,” he said, but “it would not immediately change the outlook” for 2021.

The ECB, which assumes a “medical solution” next year in its economic projections, said two weeks ago that it’s preparing to boost its emergency bond-buying program in December. In her latest appearance, Lagarde gave no sign she’s changing her tune.

“The second wave of Covid-19 presents new challenges and risks, but the blueprint for managing it is the same,” she said. “The ECB was there for the first wave, and we will be there for the second wave.”

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