The Bank of England was not the first major central bank to relax monetary policy. It was, however, the first to do so in concert with the government. Early on Wednesday morning the bank announced a 50-basis-point cut to Bank Rate, from 0.75% to 0.25%, and “a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves”. At lunchtime the same day, Chancellor of the Exchequer, Rishi Sunak delivered an equally dramatic Budget speech that was far removed from anything presented by a Conservative government in decades. The borrow-and-spend plans will involve massive new government borrowing, which the chancellor hopes can be achieved at low cost, around 0.29% per annum at the moment.
Investors were briefly impressed but the pound ultimately had a losing week, falling by an average of 0.6% against the majors. Most of that loss came on Thursday, as panicking investors fled for the safety of US treasury bonds. Even at the best of times investors struggle to see the pound as a safe haven.
European Central Bank president Christine Lagarde was almost openly jealous of BoE governor Mark Carney when she held her press conference on Thursday. Having warned European Leaders on Tuesday evening that their input was essential to avoid a crash on the scale of 2008, nothing material was forthcoming from them by the time the ECB Governing Council made its decision to leave interest rates unchanged. Although it did roll out more stimulus, including the provision of liquidity to businesses, the Governing Council decided “unanimously” that to cut rates would be unproductive.
Ms Lagarde emphasised the need for governments to shoulder their share of the burden, no matter how politically distasteful they may find it. “I’ll tell you what I’m worried about: it would be the complacency and the slow motion process that would be demonstrated by the fiscal authorities of the euro area in particular… I don’t think that anybody should expect any central bank to be the line of first response. It’s fiscal first and foremost.” In the absence of a rate cut, the euro had a moderately successful week, strengthening by three and a quarter cents against sterling. It lost a third of a US cent.
The dollar was among the week’s top three major currencies, narrowly beaten by the safe-haven Japanese yen and Swiss franc despite a storming day on Friday. Its success owed much to the appalling performance of the stock market, which fell 17%, the biggest weekly loss since 1987. It was also partly the result of the government’s failure to come up with any meaningful measures to fortify the economy in the face of the tragic Covid-19 virus. There is the usual argument between the Democratic House of Representative, the Republican Senate and the President about what ought to be done. Hence, nothing has been done beyond the $8.3 billion spending package announced a week ago.
Investors were frightened and that fear translated directly into a desire for safety. US Treasury bills and bonds are perceived to be the safest of safe investments, and as investors fled from equities they stocked up with T-bonds, pushing the entire yield curve below 1% for the first time. In doing so, they took the dollar an average of 2.5% higher, with a four-cent rise against sterling.
On Wednesday, Canada announced stimulus measures of its own, with an allocation of just over $1 billion to help mitigate the impact of Covid-19. Prime Minister Justin Trudeau said the government is “pulling out all the stops” to help Canadians through the tragic global health crisis. Like the UK Treasury, Canada’s government is looking for ways to support workers who are not eligible for standard sickness benefit.
The package did not do a great deal for the Canadian dollar, which fell more than two and a half cents behind the US dollar and lost three quarters of a cent to sterling. Its fortunes were more than a little damaged by a falling-out at the OPEC meeting at the end of last week which torpedoed oil prices. Russia could not agree with Saudi Arabia’s call for further production cuts and it rapidly turned into a price war. Prices fell sharply on Monday before stabilising. WTI crude is 30% - nearly $13 - lower on the week.
Australia also announced a stimulus package on Wednesday, the first since the 2008 global financial crisis. Although under 150 residents have so far been affected by Covid-19, Scott Morrison’s government was keen to get its retaliation in early. At a press conference on Thursday, he told Australians to “be assured we are taking action and we do have a clear plan”. Like all the best plans, Mr Morrison’s has three goals: “One, to protect Australians’ health. Two, secure Australians’ jobs and livelihoods. And three, set Australia up to bounce back stronger when the crisis is over.” In the scheme, small business will each receive $25,000 and $750 will go to every welfare recipient, including pensioners and the unemployed.
The news did little good for the Australian dollar, and only the oil-stricken Norwegian krone had a worse week. The Aussie lost three US cents and fell by an average of 2.1%. It gave up three cents – 1.5% - to the British pound.
Jacinda Ardern’s government has announced no stimulus measures to counteract the tragic Covid-19 pandemic. A very good reason for not doing so is that the country has yet to feel any serious effect from the outbreak. New Zealand has five confirmed and two probable cases of coronavirus. Two people who were confined to hospital have been released and 252 self-isolated close contacts of the confirmed cases are being monitored daily by health staff. There have been no new cases for six days. Finance minister Grant Robertson said on Thursday that contingency plans for a wage subsidy scheme are in hand but Australian-style cash stimulus would only be considered if the situation were to worsen.
There is a more immediate possibility that New Zealand will impose new travel restrictions, though an announcement expected this Friday failed to materialise. Relative to the US dollar and the safe-haven Japanese yen and Swiss franc, the Kiwi had a poor week, losing nearly two US cents. However, it strengthened by 1.7% against the Aussie and added a third of a cent against sterling.