Quick Links
Save
Plan
Invest
ONLINE GUIDES View Full Library
How To
Invest
in Equities
ONLINE GUIDE
How To Save
and Invest Tax
Efficiently
ONLINE GUIDE
How to Save,
Plan and Invest
for your Family
ONLINE GUIDE
By: Tim Bennett
13.03.2020
13.03.2020
Central Banks are lining up to combat the financial impact of the coronavirus threat. But they may not be effective this time says Tim in his latest video.
Background
Under pressure to act as the coronavirus spreads around the planet, central banks are mulling what to do next. The Federal Reserve has already cut the US interest rate in response. Over the last decade, this sort of monetary easing has succeeded in propping up sagging stock market – but will this time be different?
Why coronavirus is such a worry
Around 12,000 die every year from seasonal flu. So, what has got everyone so spooked about a virus that, at the time of writing, had killed a small faction of that number? The answer is the huge uncertainty around this new strain – a virus that was, until a few months ago, unknown has spread around the world at record speed. Worse, there is no vaccination available and there won’t be for some time yet.
The demand effect
For nervous investors, there is a fairly obvious consequence of this in terms of demand. As the virus takes hold in more countries, people and businesses are retrenching by cutting back on spending and socialising. The impact of this is likely to be deflationary and that is what Central Banks have been responding to with interest rate cuts and the possibility of further quantitative easing.
The supply effect
However, this may not work. That is because there is a supply effect at work here too. As factories in places such as china have shut, so production has slowed or even stopped. So far, this hasn’t mattered as with demand falling the fact there are fewer things around to buy doesn’t really have an impact. However, should falling supply meet rising demand in the future (as the virus recedes and confidence returns) Central Banks will be faced with having to reverse their current path and raise rates to ward off inflation. The harder they cut now, the faster they will have to respond later.
The reputational risk
The fact that Central Bank ammunition could be wasted this time around raises another possibility – that people lose faith in the “Central Bank put”. Since the financial crisis a decade ago, investors have come to regard Central Banks as the last bastions when it comes to stimulating the markets and restoring confidence. What if this time they are exposed as impotent? After all, interest rates are already not far off record lows and quantitative easing has resulted in ballooning Central Bank balance sheets. Worse, a supply crunch could derail a strategy that has worked for over a decade further weakening confidence.
Conclusion
The bottom line this time is that Central Banks are “damned if they do and damned if they don’t”. People expect a big response to coronavirus without any real appreciation of what it should be or the risks if it doesn’t work. The danger is that central banks may use up their firepower fighting battle they cannot win whilst sowing the seeds for more trouble further out. Only time will tell.
To find out more
Please speak to an Adviser to discuss your strategy or email me on [email protected] if you have specific queries relating to the video that accompanies this script.
