Central Banks Are Looking Beyond Just Rate Cuts to Combat Virus

06 Mar 2020, 01:35 PM IST

(Bloomberg) --

Central banks are ready to delve deep into their toolkits to address the economic impact of coronavirus.

While interest-rate cuts -- the traditional and most powerful monetary tool -- are still on the agenda, policy makers are also considering targeted measures that may be better suited to helping small and medium-sized companies. The European Central Bank, Bank of England and Bank of Japan have all signaled they have such plans in the works.

Part of the rationale is that most central banks don’t have much room to reduce rates further. Both the ECB and BOJ are already below zero and the BOE is at 0.75%. Matching the Federal Reserve’s emergency cut of half a percentage this week would stretch them almost to their limits.

Central Banks Are Looking Beyond Just Rate Cuts to Combat Virus

But they’re also aware that the Fed action wasn’t enough to assuage market jitters over the virus, which is hitting parts of the economy that rely more on bank loans than markets for funding. Those businesses face potentially ruinous disruptions that they need to cover.

“Businesses need help to overcome short-term cash-flow problems,” said Paul Donovan, global chief economist at UBS. “Standing on the roof of the Federal Reserve building and showering passers-by with rate cuts may achieve that, but it is imprecise.”

Lending Programs

The Bank of Japan is already working on new measures to address those concerns, with officials likely to consider the introduction of a new lending program this month to help companies affected by the outbreak, according to people familiar with the matter.

The bank has three main lending programs, and the people said it will probably discuss whether to adjust those or create a new program. One is aimed at loans to support industries for economic growth, another looks to encourage bank lending, and the other one offers support for banks in areas hit by natural disasters.

The Bank of Korea unexpectedly kept its benchmark interest rate unchanged last week, arguing that it could more effectively ease virus pain through offering direct support to businesses, including an increase in the cap for cheap loans.

Indonesia has cut rates once so far this year, but has also focused some of its ammunition lowering lenders’ reserve ratio requirements, effectively freeing up more cash for banks to lend.

At the ECB, where investors expect a 10 basis point rate cut at next week’s meeting, President Christine Lagarde has promised an “appropriate and targeted” response. That suggests she’ll also look at other measures.

The central bank already has a program of three-year loans to banks, with the next round due later this month. It might make the terms more favorable, or offer an alternative credit line that specifically encourages lending to virus-hit businesses. Implementing those changes would take time though.

Alternatively, it could allow national central banks to accept loans to virus-hit companies as collateral, so assuaging concerns among lenders about taking on too much risk. It wouldn’t be unprecedented -- the ECB has accepted some credit claims that wouldn’t normally qualify since 2012, and last year extended the policy until 2023.

Relaxed Supervision

The ECB’s bank oversight arm could offer relief by relaxing its guidance on setting aside funds for soured loans, as the Italian Banking Association has urged. That would free up money for lending, though it runs counter to the ECB’s argument that banks will ultimately be stronger if they deal swiftly with their bad debt.

Supervisors could also show more flexibility if banks dip below the levels of financial strength they’re expected to hold.

Government Cooperation

Fighting the virus may require more explicit coordination with governments than independent central banks are used to. Incoming BOE Governor Andrew Bailey told U.K. lawmakers on Wednesday that his officials will work hand-in-hand with the Treasury to combat the economic fallout from the coronavirus.

“We must act in a coordinated fashion,” he said. “We can’t let our notions of independence get in the way.”

Bailey suggested the need for “some kind of supply chain finance” to mitigate against the shock, without giving more details. He also stressed the BOE has many tools at its disposal beyond rate cuts.

The government is due to unveil its budget on March 11, and analysts are increasingly speculating that the BOE will install a suite of measures to complement that. They could come at its March 26 policy meeting, or earlier.

Ideas range from introducing a new Term Funding Scheme, which gives banks cheap funding for loans to companies, and freeing up cash by lowering a mandatory capital buffer that banks are required to hold in case of downturns.