CENTRAL BANKS LEAVE MONETARY POLICY UNCHANGED

Central banks around the world had stepped up when the coronavirus reared its head in the first quarter of 2020. But most of them are keeping their powder dry for now as their previous actions trickle into the system, and as they wait to see how the pandemic plays out.

In June, US Federal Reserve chairman Jerome Powell, said the country’s economic outlook remains cautious despite an encouraging turn in high-frequency data, initial signs of rehiring and a bounce back in consumer spending.

The central bank remains committed to using its full range of tools to support the US economy in this challenging time, and promote its maximum employment and price stability goals.

Powell also stressed the virus “poses considerable risks to the economic outlook over the medium term.” And that “until the public is confident that the disease is contained, a full recovery is unlikely”.

The European Central Bank, Bank of Japan, Bank of England and People’s Bank of China, apart from the Saudi Arabian Monetary Authority are all on pause as they assess the damage caused by COVID-19 and what other measures will be required in the third and fourth quarter.

Amid this backdrop, the US dollar has had an eventful year so far. The world’s de facto reserve currency has soared and then dipped amid market volatility and was trading around mid-July at 96.23 points against a basket of currencies – just below levels seen at the start of the year.

After falling around 6% against a basket of currencies between March and June and amid a drop in capital markets, the US dollar is gaining strength again.

The greenback had been wobbling as the country was unable to rein in coronavirus cases and there was considerable confusion between governments at the municipal, state and federal level on how to combat the crisis.

The US economy is expected to dip 40% in the second quarter, according to The Conference Board, on the back of rising unemployment and subdued consumer spending.

“In the event that COVID-19 is rapidly brought under control, unemployment could ease further, and consumer confidence could rise, resulting in a stronger ‘Swoosh’-shaped recovery which brings the economy back to pre-COVID-19 levels of output by the end of 2021,” the board said.

However, a persistent second wave of COVID-19 cases in the autumn, which would result in widespread economic lockdowns could yield a weaker ‘W’-shaped recovery that would hurt fourth quarter growth and extend this economic crisis into 2021, the board warned.

COVID-19 cases are rising in the United States, and some states such as California have stepped back from their reopening plans.

S&P Global Ratings says it sees no substantive changes in monetary policy from the Fed over the next 12 months.

“Absent a sustained rise in inflation above its target, the Fed will not raise its policy rate until the labour market is largely healed. We expect the Fed to keep rates on hold until at least 2023,” according to the ratings agency.

The International Monetary Fund revised its estimates for global growth by 1.9 percentage points to 4.9% for this year.

“The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” the IMF said in its June update. “In 2021, global growth is projected at 5.4%. Overall, this would leave 2021 GDP some 6.5 percentage points lower than in the pre-COVID-19 projections of January 2020.”

The European Central Bank is also keen to maintain loose monetary policy, although most EU countries have been able to flatten the curve and have seen a noticeable uptick in business activity.

Amid contrasting responses to the health crisis, the euro has surged 1.5% against the American currency year to date (July 15).

Japan, which has also managed to cap COVID-19 cases for the most part, saw its currency slip 1.29% against the American dollar. In June, the Bank of Japan said it would leave monetary policy unchanged, maintaining the current level of short- and long-term rates and the broad specifics of its asset purchases. However, the bank upgraded its support measures for corporate credit, including corporate debt purchases and its new COVID lending programme, to JPY 110 trillion (USD 1 trillion).

The People’s Bank of China also kept its benchmark 1Y Loan Prime Rate (LPR) unchanged at 3.85% in June – the second consecutive month that PBoC stays put after the larger-than-usual reduction in April. The Chinese yuan has risen 0.64% against the American greenback year to date.

Monetary policymakers will likely maintain their stance going into the third quarter, but are poised to act if the global economy does not settle down soon.