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Last week we noted the panic that set through global financial markets as further details of the spread of Coronavirus came to light.
In response to these fears, the Reserve Bank of Australia cut rates to yet another historic low – just 0.5%. The US Federal Reserve followed suit, cutting the cash rate by 50 basis points at its first emergency meeting since the global financial crisis. And now, as at time of print, Malaysia, Canada and Hong Kong have all undertaken similar actions.
But even with these cuts financial markets remain extremely nervous, raising questions about the efficacy of monetary policy in responding to situations like these.
In general, the easing of credit market conditions (through lowering the cost of borrowing) aims to boost credit activity amidst weak demand. It’s why we saw official interest rates fall to the floor during the 2008 global financial crisis (GFC); it was hoped that cheaper credit would encourage more people to borrow and spend through the economy.
But the circumstances of the current crisis are different to the GFC. While demand has been hit in many sectors (similar to the GFC), the spread of the virus – and the response by governments to halt it – has caused disruption to supply chains around the world as well. Workers are forced into quarantine in response to greater health regulations and constantly evolving global policy responses. For Australia in particular, travel restrictions are hurting the international education sector, dragging down an important contributor to the Australian economy. Importantly, the fall in student numbers is not down to students not wanting to come, but rather due to the restrictions in place that prevent them from doing so. No amount of cheap credit is likely to change that.
Similarly, the extent to which consumer and business demand has weakened in response to the crisis is – on the most part – not due to the inadequate income or high borrowing costs. Overwhelmingly, demand is being stifled by fear: Will this cause a recession? Will my job be affected? What if I get sick? These questions are making consumers more cautious in how they spend, yet also causing a run on essential household products in supermarkets and pharmacies.
These same questions are being asked by business. In the latest edition of Deloitte’s CFO Sentiment survey, CFO optimism about the future fell to 54%, down from 68% just six months ago. That’s causing businesses to delay investment and minimise staff wage growth. In addition, businesses are being forced to cancel trips and meetings as travel restrictions are implemented, hurting the transportation and hospitality industries in the process. Again, the actions of central banks around the world will be unlikely to change this.
The main channels though which cheaper credit may be effective include house prices (which arguably don’t need further stimulus), housing activity, and the tradeables sector through a yet lower $A. We await the announcement of targeted fiscal stimulus by the Federal government, which may be a more effective route to protecting jobs in the face of both demand and supply side challenges.
 Importantly, part of this survey was conducted before the worst of the bushfire season and the emergence of the coronavirus. It’s likely both of these factors would exacerbate the levels of uncertainty noted by CFOs in this survey.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.