central banks

Pandemics like COVID-19, alarming and destructive as they are, have brought the world to a halt. With countries closing their borders, suspending flights and asking citizens to stay indoors, everyone is hoping for this to settle quickly else, the consequences would be too much to compensate. In these testing times, it is interesting to see what strategies have been adopted by the central banks across the world.

A few weeks back, central bank Governors and Finance Ministers at the G7 vowed to use all apt policy intervention tools to contain the economic consequences of the COVID-19 outbreak. Many pundits are drawing a parallel of this pandemic with the 2008-09 global Financial Crisis but the question unanswered is what tools would work this time around.

In the United States of America, the Federal Reserve has announced plans to buy $700 billion in government securities and dropped its key interest rates to near zero, a dramatic move not seen since the 2008 financial crisis. 
The European Central Bank announced a few days back that it would spend Euro 750 billion in bond purchases to calm the sovereign debt markets to fight against the economic fallout of Covid-19.Similarly, central banks in England, Canada, China, Australia and Japan have also taken emergency steps to keep the money flowing into their financial systems.

Though the central banks have moved quickly into action, many experts say it is not clear how much they can do, given that interest rates are already at rock-bottom levels. Back in the 2008 Financial Crisis, the central banks had a huge role to play as the supply of finance had dried up due to high debt in the global financial system. Central banks could do the needed repairs by injecting money into the system and ensuring the flow of credit by reducing rates to bare minimum. 

The problems coming out on account of Covid-19 are different altogether from the 2008-09 crisis. Zero or near zero interest rates cannot make up for the production loss as monetary policy cannot reopen factories, cannot get shoppers back to the malls or travellers back to the airplanes as the main question is of safety and not cost. The same stands true for the fiscal policy as well. Tax cuts or government spending cannot get the production started in times when firms are preoccupied with their employees’ health and the risk of spreading disease.  

Times like these highlight the importance of the health care system and administrative competence in a country. For now, the problem seems not a paucity of liquidity but a disruption of supply chains and a contagion of fear.

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