Over the last week the following has happened:
· In the UK last week, the Treasury and the Bank of England announced the right measures in principle, showing excellent cooperation, but need to increase the volume of intervention quickly.
· As I write, the Chancellor is making further announcements: £330 billion of government-backed loan guarantees; cash grants of £25,000 per business “to help bridge through this period;” mortgage lenders will provide three-month mortgage holidays for those that need them; and he promises further measures in the coming days.
· In the US today, the Federal Reserve Bank (the Fed) announced a special credit facility to purchase corporate paper from issuers that have been having a difficult time finding buyers on the open market. Corporate paper involves unsecured short-term lending.
· On Sunday night, the Fed cut the Federal Funds Target range by 100bps to 0-0.25% and said that it would resume asset purchases of USD700bn in Treasuries and Mortgage Backed Securities. There is a Fed meeting due on March 17-18th although the Fed is clearly now acting as and when it sees the need.
· Last Thursday, the Fed announced that it would inject USD1.5tn into funding markets and purchase US Treasury bonds to improve the Treasury market trading and liquidity.
· In the European Union, the European Central Bank (ECB) announced an extra €120bn “envelope” of asset purchases available until the end of the year, alongside easing the capital requirements for banks, and a new round of cheaper financing for banks when they make new loans to businesses and individuals. They have said that they will do more if required.
· Neither the ECB or the Bank of Japan (BoJ) has cut interest rates, but both already have negative interest rates.
· The BoJ announced an increase in asset purchases on Monday morning. It will double its purchasing of exchange-traded fund securities to 12 trillion yen ($112 billion) rattled by the spread of the new coronavirus.
· The BoJ also said it will boost its target for commercial paper and corporate bond purchases by 2 trillion yen until the end of September.
· To facilitate corporate finance, the BoJ will also provide new loans against corporate debt of about 8 trillion yen as collateral at a zero interest rate for up to one year.
· All the major central banks have agreed to ensure that the supply of dollars to the global trading and financial system remain sufficient.
· China had already made substantial commitments prior to this time, and continues to support networks.
These measures are essential to stabilise financial markets, banking and trading systems, and corporate liquidity. There is no reason to believe that they will fail to do what is necessary.
More of the above, more “QE”, and other innovative forms of support are likely.
Tomorrow I intend to write on one such innovation “helicopter money”, and thereafter about the published spending plans of major governments.