By Eliman Dambell
After the US Federal reserve cut rates on Super Tuesday last week, it was almost inevitable that central banks world wide would follow. Days after this announcement the Bank of Canada followed their North American counterparts as Stephan Poloz announced that they will also be cutting rates. So what of the Europeans? What moves could they possibly make to ease market tensions?
Wednesday morning saw the Bank of England announce they too would be cutting rates, in their first emergency cut since the 2008 global crisis. The move comes as the bank says the intention will be to “ protect firms and jobs”. This cut sees rates reach their lowest point in history as the bank hopes to sure up the economy as the Coronavirus virus worsens.
Who does this help?
The effects of this come in 2 forms firstly to lending, and potentially increasing consumer confidence. Secondly to help boost the investor activity into the markets. The latter has already started taking shape, with the FTSE 100 experiencing a close to 2% rise in the immediate aftermath of the news.
However although the news will be a boost to consumer lending, and increase borrowing activity, it has already created panic, as stock prices started to fall once the news was fully digested. As seen on the above chart. Essentially what seems to be happening is Batman was called in to save everybody. However those who are being saved didn’t know that the magnitude of the problem was as great as to require an intervention from Batman to save the day. This analogy is similar to what we saw take place when the FED initially cut rates, the markets initially rallied, before being consumed by the storm.
The storm in relation to the Coronavirus seems to be getting bigger and creating more damage. So far from over 25,000 people tested, 373 cases have been reported. As the amount of infections spread, public gatherings and sporting events have started to get cancelled as a precautionary measure. Arsenal and Manchester City moved to postpone there football match in a move which may see other football teams follow.
Effects on The Pound
The move saw the pound initially gain strength against the Dollar. Moving as much as 1252 pips in the space of under 1 hour, however the level of uncertainty of what this actually meant, saw the markets revert back to the quoted rates, prior to the news announcement.
Thursday is now expected to see the ECB follow the lead of the rest of the world’s major Central Banks in making an emergency cut. The Bank’s chair, Christine Lagarde has already come out strong in stating that Europe must take action to ease markets. In what many believe to be a form of forward guidance, on what she will likely do tomorrow. If this move were to occur it will be the first emergency cut since 2008, and the first time all 3 major Centrals Banks have taken such an impactful and joint decision for the sake of Global markets since the housing and mortgage bubble in the US burst.