Corona virus: Concerted central bank action could be imminent

In the meantime, there are growing signs that the major central banks, the Fed, ECB, BoJ and BoE, could take measures in view of the spread of the corona virus. This could involve interest rate cuts as well as increases in purchasing programs.

The risks for the global economy have undoubtedly increased. The quarantine measures and production interruptions should have a noticeable impact on the global economy. In particular, countries that are heavily dependent on exports, such as Germany, are likely to suffer more from the economic activity that has been paralyzed in some areas. The United States, on the other hand, will probably be only slightly affected by the negative consequences of the virus epidemic, although a complete economic decoupling will not be possible.

Ultimately, however, interest rate cuts and/or concerted action by central banks are unlikely to have a positive impact on the real economic environment. Thus, supply chains will remain disrupted despite renewed monetary easing. Consumer activity will not be accelerated by interest rate cuts. Even helicopter money, as in Hong Kong, for example, is unlikely to have any real economic consequences as long as people do not go to the department stores for fear of contagion. Nor are any effects on investment activity to be expected, nor is a realistic stimulus for production activity. The effects on the real economy are likely to be rather marginal.

One reason for a more expansive monetary policy on the part of the central banks could be to support the stock markets once again with a renewed flood of money and further interest rate cuts. The aim should be to strengthen general sentiment. The risk that the positive effect will not last long is even greater this time than in recent years.

The past few years have shown that central banks around the world have repeatedly managed to increase the degree of monetary expansion despite an already ultra-expansive monetary policy. However, in the current situation, which represents a supply shock, a fiscal policy would be more effective. Companies do not benefit if key interest rates are cut while they run out of intermediate products from China due to disrupted supply chains. The far-reaching experience that governments have gained during the financial crisis with regard to measures such as short-time working, liquidity support and scrappage schemes could now score points here.

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