This week we saw several major central banks announce monetary stimulus measures in the wake of coronavirus concerns. Most recently, the Bank of England (BoE) cut interest rates to 0.1%, adding further quantitative easing (QE) through increasing the bond purchase program by £200 billion. We feel this further supports coordinated action taken by the Monetary Policy Committee and the UK government last week. In our view, this should be supportive for the Gilt market as fiscal spending in the United Kingdom ramps up.
The recent volatility in the Gilt market is not supportive of the BoE’s goals, so it is not surprising that policymakers have acted again. This latest action demonstrates that the BoE will continue to provide liquidity to the market and wants to keep interest rates low for the foreseeable future.
Given the BoE has cut rates to 0.1%, their self-defined lower bound, we would anticipate any further easing to would be done through further additional bond purchases. We expect that the BoE will focus on purchasing Gilts over a short time horizon, and therefore Gilts should likely remain well anchored in the coming months.
Meanwhile, the European Central Bank (ECB) attempted to regain credibility this week with the launch of a €750 billion Pandemic Emergency Purchase Programme (PEPP). The size of the program is what we were hoping for from the ECB’s meeting last week, unveiled after several days of dislocation in European bond markets.
The latest package increased the total of additional QE announced in the past week to €870 billion, which should be enough to help calm European sovereign bond markets. We anticipate it should be most beneficial for Italian, Spanish and Greek government debt, but also should narrow spreads of other European government bonds. This also demonstrates that the ECB will continue to unveil measures to combat the dislocations in the market resulting from the pandemic. The increased QE, combined with the other measures the ECB announced at last week’s meeting, should be very supportive for the eurozone.
We expect monetary policy to remain extremely accommodative and the ECB to support markets, in tandem with the fiscal loosening by European countries, which has been one of ECB President Christine Lagarde’s key demands.
The European Union (EU) also announced a €65 billion package to provide liquidity for firms, as well as help with the coronavirus response, although the amount looks too small for the eurozone, in our view, and we anticipate more assistance should be forthcoming.
However, the EU has also suspended the fiscal parameters of the Stability and Growth Pact, which allows governments room for a fiscal response to the pandemic. Individual countries are already taking action, with Germany relaxing its previous policy of maintaining a fiscal surplus and embarking on a policy of doing “whatever it takes,” mainly using the state development bank KFW to provide unlimited cash to businesses hit by the crisis. The German package looks to be around €460 billion, but could be as much as €550 billion [15% of German gross domestic product (GDP)].
In addition, Spain and France have announced packages of €200 billion and €300 billion, respectively. Italy has only announced a smaller package so far, but we expect a larger, more comprehensive package soon. There have been suggestions that a “pandemic” bond could be issued at the European level, with cross guarantees, to combat the crisis and it appears Germany is mildly supportive. Overall, we think the situation remains very fluid.
Given the sudden halt across European economies, we expect a sizable hit to GDP this year. These circumstances—and the unknowns surrounding how long the lockdown conditions will last—make it critical that European policymakers at the ECB and the EU, as well as individual governments, are creative and continue to announce ongoing measures to combat the economic fallout from the pandemic. In our view, a combined monetary and fiscal response is the only way to address this systemic event.
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