The United States Federal Reserve slashed the benchmark US interest rate by half a percentage point on Tuesday, which marks the biggest cut since the global financial crisis following a unanimous vote by Fed leaders in favour of the rate reduction.
As per analysts, this is a sign from the Fed that will trigger action from central banks to act fast in order to curtail and manage the economic fallout and repercussions of coronavirus.
This reduces the interest rate to 1.25pc down from 1.75pc.
This emergency rate cut is not unprecedented, but it has not been witnessed since 2008. This follows after President Trump called for a “big” rate cut.
President Trump tweeted on Tuesday stating that the Fed was not lowering its benchmark interest rates fast enough.
“The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the [Fed] decided today to lower the target range for the federal funds rate by 1/2 percentage point,” the Fed wrote in a statement.
Fed Chair Jerome Powell is to hold a conference at 11am to further comment on the move.
Many experts believe that coronavirus is the biggest threat to the global economy after the 2008 financial crisis. With an already slowing global economy owing to previous trade disputes, production slowdowns, and lack of strong reactions to central bank stimulus, the virus has weighed heavily on the economy.
The Organization for Economic Cooperation and Development states that the virus has now spread to 60 nations in Europe, the US, Latin America, and Asia. The virus holds the potential to cause the world economy to shrink this quarter for the first time since 2008.
As a result, the OECD has downgraded its forecasts by half a percentage point to 2.4pc and commented that it may go as low as 1.5pc, if not tamed.
Analysts, however, believe that this emergency rate cut may not attain the desired results. With interest rates already at a low, it remains unlikely that people will want to step out and spend due to fears of catching the virus. Production is also likely to remain dampened due to supply chain disruptions.
In spite of China being the origin of the virus, Chinese markets have managed to perform better than other markets.
Meanwhile, the Group of Seven (G7) has pledged to use “all appropriate tools” to deal with the spreading coronavirus. While the statement lacks any announcement of immediate actions, it can be said that the US has already acted upon using its tools.
The G-7 has issued similar joint statements during periods of extreme market turmoil, such as the Sept. 11, 2001, terrorist attacks and the 2008 financial crisis.
“Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks,” the G-7 said.
Speaking to Profit, Sami Tariq, Head of Research at Arif Habib Limited states, “Global central banks are reducing interest rates to combat the negative impact of coronavirus. This might also persuade our central bank to cut the discount rate in the upcoming monetary policy.”
Citing a report released on 28 February by AHL, Tariq believes that the SBP can afford to cut rates considering how inflation is tapering off, oil prices are down globally, and domestic bond yields have declined.
–With Additional Reporting by Meiryum Ali
