The Saudis raised selling prices, Norway cut rates to zero, the Bank of England tipped more stimulus, and the US and China are set to discuss trade next week, as the coordinated, global firefighting effort continues.
Two BOE policymakers angled to immediately announce an increase in QE by 100 billion pounds, while the other seven concurred that the rather obvious downside risks “might necessitate further monetary policy action” in the near future.
Andrew Bailey was keen to note that just because no action was taken today, doesn’t mean more isn’t coming soon. On March 19, the BoE cut rates nearly to zero and expanded QE. That move came just eight days after the last rate cut and announcement of emergency measures.
The current QE program (£645 billion) will run dry within two months. That means an announcement on topping up the program (or simply making it open-ended, which it basically is anyway) will likely come sooner rather than later.
The bank also warned that the economy will likely collapse by a third by June from the start of the year – that’s 30%.
“While there are wide bands of uncertainty around any estimates of activity at the present time, UK GDP is expected to be close to 30% lower in 2020 Q2 than it was at the end of 2019”, the bank said, in its updated assessment. “UK GDP is expected to have fallen by around 3% in 2020 Q1 and then to fall by a further 25% in Q2”.
The bank’s projection calls for a 14% economic hit in 2020 from the virus, followed by a sharp rebound of 15% in 2021.
“The key message from the Bank of England today is that the economic hit has been large. Policymakers estimate the economy will be 30% smaller by the end of the second quarter – a larger hit than most forecasters, ourselves included, had been pencilling in”, ING said, in a quick take.
“[The BOE’s] stylized scenario loosely assumes both GDP and unemployment returns to pre-virus levels/trends at some point in 2021”, ING went on to write, before cautioning that they “expect a much slower recovery” with the “true path” likely to be more gradual, and the economy unlikely “to recover its lost ground until at least 2022, and perhaps later”.
For its part, the Norges Bank delivered what’s being described as a “shock” rate cut to zero.
Just two economists out of nearly two-dozen polled projected the cut.
“Activity in the Norwegian economy has fallen abruptly as a result of the coronavirus pandemic”, the bank said. “The downturn is amplified by the severe impact of the pandemic on surrounding countries and by a sharp fall in oil prices”.
The Norges bank has been on the move during the crisis, taking a series of steps in March, when NOK slid to multi-decade lows. Norway has expressed skepticism towards flirting with ZIRP in the past, but you know what they say about desperate times.
“Low interest rates cannot prevent the coronavirus outbreak from having a substantial impact on the Norwegian economy, but can help dampen the downturn”, the bank remarked. “As the situation normalizes, low interest rates will support a faster rebound in activity [and] this may reduce the risk of unemployment becoming entrenched at a high level”.
Rates will remain flat for the foreseeable future, Oystein Olsen said. The new rate path envisions zero out to 2023. The bank said the economy will contract 5.2% for the year.
(Nordea)
Olsen didn’t rule out negative rates, but adopted a circumspect tone.
“The central bank also announced that they made extraordinary NOK purchases in the foreign exchange market totaling NOK 3.5 billion in March, in order to repair what was for a short period a dysfunctional NOK market”, Nordea wrote, recapping the decision. “Norges Bank also today announced that they prolong the extraordinary F-loans for as long as needed, and in any case as long as throughout August [meaning] banks can borrow 3M money at 0% against collateral till after the summer”.
Obviously, the plunge in crude prices was just insult to injury for Norway, Western Europe’s largest producer. One estimate pegged the economic contraction for March at 14%.
Speaking of oil, the Saudis on Thursday sought to help bolster improving sentiment by cutting discounts. Most June crude pricing to Asia was raised, and as Bloomberg notes, “some of the biggest moves… came for European and Mediterranean refineries, the main market for Russia crude, in what appears to be a nod to the Kremlin after Riyadh and Moscow agreed last month to work together again as part of the OPEC+ alliance”. Those prices (which were slashed dramatically in March when the Saudis fired the first shot in the short-lived price war) were raised by between $5.80 and $7.50 for June.
Finally, Bob Lighthizer and Liu He will chat over the phone next week to discuss the state of the “phase one” trade agreement amid shrill rhetoric from both sides surrounding the origins of the coronavirus.
Trump has repeatedly threatened to cancel the deal and slap more tariffs on China if Beijing doesn’t make good on its promises (come hell or high epidemic), and/or if it turns out the Party covered up a lab accident at the Wuhan Institute of Virology.
The planned phone call will be the first time Lighthizer and Liu have spoken since January.
