Goldman Sachs and Barclays "Aim for Zero Interest Rate Over 2 Months"
EU to Provide 25 Billion Euro Support for COVID-19 Response
[Asia Economy Reporter Jeong Hyunjin] The U.S. Federal Reserve (Fed), which made a surprise interest rate cut in response to the novel coronavirus disease (COVID-19), is expected to take the 'ultra-strong measure' of zero interest rates soon. As major countries such as the U.S., Europe, and Japan have launched large-scale fiscal stimulus 'money printing' policies to respond to COVID-19, attention is also focused on the decisions to be made by central banks such as the European Central Bank (ECB) and the Bank of Japan (BOJ).
According to Bloomberg News and others on the 10th (local time), JP Morgan Chase predicted that the Fed will lower interest rates to the lowest level since 2015 by next week. Economists at JP Morgan, including Michael Feroli, stated that the Fed will cut rates by up to 100 basis points (1bp = 0.01 percentage points) either at the Federal Open Market Committee (FOMC) meeting scheduled for the 17th-18th of this month or before that. Considering the current Fed benchmark interest rate is 1.00-1.25%, it could be lowered to 0.00-0.25%. If this happens, the U.S. benchmark interest rate will experience zero interest rates once again.
They said, "There is no reason for the Fed to prepare for a worst-case scenario," adding, "If it judges that it has sufficiently observed the situation, it may act before next week's FOMC." They further explained that if no action is taken until the FOMC meeting, "the reason is to wait for timing to gain a broad response to the policy."
There is also a view that the Fed choosing zero interest rates this year is only a matter of timing. Goldman Sachs and Barclays predicted that the Fed will hold FOMC meetings this month and on the 28th-29th of next month and cut the benchmark interest rate by 0.50 percentage points each time to lower it to zero interest rates. This forecast comes considering that the Fed held an emergency FOMC on the 3rd and cut the benchmark interest rate by 0.50 percentage points as a preemptive measure, expecting further rate cuts. U.S. President Donald Trump pressured the Fed again on the day, saying additional rate cuts are necessary.
Other major central banks such as the ECB and BOJ, which did not immediately join the rate cut movement, are closely monitoring whether the market turmoil caused by COVID-19 is spreading to the real economy. ECB President Christine Lagarde participated in a video conference with European Union (EU) member state leaders on the day and reportedly said she would propose measures for small and medium-sized enterprises at the monetary policy meeting on the 12th. However, Portuguese Prime Minister Ant?nio Costa told the media that she also requested governments to actively implement fiscal policies. The market expects the ECB to lower the current -0.5% interest rate by another 10 basis points.
If the ECB lowers interest rates, it is expected to support the EU's fiscal policy. Ursula von der Leyen, President of the European Commission, announced on the day that a COVID-19-related fund worth 25 billion euros (approximately 33.9 trillion KRW) would be established. This fund will be used to support healthcare systems, small businesses, and labor markets. Italy and Germany also prepared emergency budgets of 7.5 billion euros and 12.4 billion euros, respectively.
The Japanese government decided to invest 430 billion yen in the second emergency response measures to prevent the spread of COVID-19. It will also provide financial support of 1.6 trillion yen to support funding for small and medium-sized enterprises. Accordingly, attention is focused on whether the BOJ, which is scheduled to meet on the 18th-19th of this month, will adjust the current benchmark interest rate (short-term policy rate) of -0.1%. One foreign media outlet reported, citing sources, that if the BOJ perceives that increased market volatility negatively affects corporate sentiment, it is likely to engage in money printing through additional purchases of exchange-traded funds (ETFs) next week.
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