Rate cuts can’t save the global economy from the coronavirus, say analysts

Investors are expecting the U.S. Federal Reserve — and other central banks globally — to do more to rescue the global economy from a downturn caused by the ongoing coronavirus crisis.

The Fed lowered its benchmark rate by 50 basis points in an off-schedule meeting this week. But traders have priced in another cut at the next scheduled Fed meeting on Mar. 17-18. The CME FedWatch tool shows around 80% chance of another 50 basis points easing at the next meeting two weeks later.

The Fed’s target rate is now between 1% and 1.25%.

But some economists and strategists said monetary policy tools — such as interest rates — may not do much to help the global economy weather shocks from the coronavirus disease, which is also known as COVID-19.

“The idea is deeply ingrained in financial markets that, when there is a major global economic downturn, central banks quickly come to the rescue with aggressive policy rate cuts,” analysts from Japanese bank Nomura wrote in a Thursday report.

“Markets are anticipating the same policy playbook even though this COVID-19-induced economic downturn is different from others,” they added.

The analysts explained that the current economic slump is not caused by financial events such as asset prices running ahead of fundamentals. Instead, it’s triggered by a spread of a new virus, so “the best immediate response” is “first and foremost health security policies,” they said.

Chris Rupkey, managing director and chief financial economist at MUFG Union Bank, said interest rates are already low so further cuts may not be effective in nudging companies to increase spending and investments.

“I don’t think rate cuts at this stage are going to do a lot of good for companies. They’re building liquidity right now, they don’t want to go out to borrow and make investments for the future. They’re kind of running for the hill,” he told CNBC’s “Squawk Box Asia” on Friday.

“So I think … the Fed should wait and see if we’re in an actual recession with job losses. I even wouldn’t recommend that, my advice for them is don’t cut rates again, it’ll be a big mistake,” he added.

Some economists said fiscal measures such as government spending should play a bigger role to counter the economic impact from the outbreak.

Simon Baptist, global chief economist at The Economist Intelligence Unit, cited Hong Kong and Singapore as examples of economies that have announced measures targeted at sectors and companies that are directly hit.

“Things like subsidies for workers or wage support in sectors like tourism, hospitality … will certainly make some difference,” he told CNBC’s “Capital Connection” on Friday.

But he added that other economies around the world may not have the finances to do the same. That’s especially true for economies in Europe, where “the room for fiscal manoeuvre is much more limited” compared to those in Asia.

Still, Fed officials — and their peers at major central banks such as the European Central Bank and Bank of Japan — appeared to be keeping open the option of lowering interest rates further.

Fed Chairman Jerome Powell said earlier this week that while a rate cut “will not reduce the rate of infection,” the central bank’s latest move would “provide a meaningful boost to the economy.”

That stance was affirmed by New York Federal Reserve President John Williams on Thursday. Williams said central banks have an important role to play in addressing the economic effects of the outbreak, and that the Fed remains flexible and ready to make further moves, reported Reuters.