The 50-basis point (bps) rate cut by the US Federal Reserve (US Fed) on Tuesday was in line with analyst expectations. The American central bank cut the interest rate in an emergency move designed to shield the world's largest economy from the impact of the coronavirus (COVID-19) outbreak.
Expectations of such a move were gaining momentum amid the sudden escalation in coronavirus cases across the globe that threatened to derail global growth.
“A rate cut was inevitable. Earlier, trade wars were causing deflationary pressures in major economies across the globe, but the coronavirus outbreak is much more deflationary. Trade wars were confined to a few economies/countries and a limited set of products. The health scare, on the other hand, will have a deeper and widespread impact and will dent global growth badly. Another cut of 50 bps by the US Fed in the weeks ahead is possible in order to lend confidence to the markets and help prop up economic growth,” said G Chokkalingam, founder and managing director of Equinomics Research.
The spread of coronavirus across major countries over the past few weeks has already seen a host of brokerages trim economic growth targets — for China and at the global level — with a recovery seen only in the second quarter of CY20. For instance, Nomura’s chief China economist Ting Lu expects China’s GDP growth to slide to 3 per cent YoY in the January-March quarter (Q1-2020), from 6 per cent in the December 2019 quarter (Q4-2019) and has lowered his 2020 GDP growth forecast to 5.5 per cent YoY (from 5.7 per cent earlier), down from 6.1 per cent in 2019.
"Between fiscal and monetary policy, we see more room on the fiscal side. Although some central banks in Asia (ex-Japan) have been hesitant to ease given financial stability and external funding concerns, we think more rate cuts are likely should downside risk materialise.
In the bear case, we see AxJ (ex-Japan) central banks easing a cumulative 12.5bps-75bps in 2020," wrote analysts at Morgan Stanley in a recent report.
Regarding the markets, Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies, said the 50 bps rate cut by the US Fed has already been priced-in. “The move indicates that the central bankers acknowledge slowing growth and are taking pro-active steps to combat it. Though the initial market reaction to this development will be positive, the subsequent news-flow as regards the containment of the health scare will be the driving force behind markets,” he said.