Coronavirus - from a monetary and fiscal point of view

This post is over a year old. There may now be updates to the facts stated and the views of the author. Please read with this in mind or check for more recent articles in LIFT-Financial.

As I am sure you have seen, we have experienced some significant volatility on investment markets in recent weeks in response to the economic impact of COVID-19 and amplified by the oil price issues between Saudi Arabia and Russia. Stuart Niman is a renowned bond market fund manager and a Consultant to our Investment Committee. Stuart has kindly shared some of his thoughts below on the likely responses from a monetary and Fiscal (public money) standpoint concerning the Coronavirus and hopefully, this will help you understand the action that governments are taking to mitigate the economic impact. 

It's clear that monetary policy needs to be coordinated and swift. We have already seen the Federal Reserve (the central bank of the USA) cut interest rates and the Bank of England's Monetary Policy Committee (MPC) has followed suit. These cuts come outside their normal meeting schedules. Other central banks have and will ease rates which shows that a crisis of this nature requires a joined-up global response.

Since 2008, many additional measures have been used as policy tools and some further use of these have already been announced on 11th March by the Bank of England in the statement accompanying the interest rate cut. The Bank of England will be buying non-financial Corporate Bonds as well as providing a Term Funding (short-term) loan vehicle for small and medium-sized businesses to help their cash-flow through any disruption period. The Bank of England has also announced the relaxation of the countercyclical capital buffer for banks and building societies which will allow more lending to individuals and businesses throughout this period.

If more stimulus is needed the MPC could also introduce other measures such as more interest rate cuts. More quantitative easing is also likely as are further corporate bond purchases and other instruments (not Government Bonds), more loans to small businesses either directly or via the Banks and direct loans to badly affected industries.

In his Budget yesterday, the Chancellor of the Exchequer, Rishi Sunak, announced £30bn of measures for the UK economy to battle the Coronavirus hit and "whatever it takes" if more is needed. We know that in previous crises whole industries have been supported such as airlines and the automotive industry, so we can expect more of that. The Chancellor stressed that he and his team are working very closely with the Bank of England and that the Fiscal response will be temporary, timely and targeted.

As of Monday, Andrew Bailey starts as the new Governor of the Bank of England and along with our new Chancellor will be guiding us through some tough waters. Many tools are being used and are also available with the further option of borrowing long-term at essentially zero cost to invest in growth.

Hopefully, this background information will help you to understand some of the actions that governments are taking to mitigate the impact on the economy. These measures are designed to quickly stimulate the economy and hopefully, in turn, will ultimately lead to a recovery in asset values. 

As we have said on many occasions, volatility in itself does not mean that you will lose money - you only make (or lose) money when you sell an investment and hopefully through the advice and skill of your adviser you can avoid having to do so throughout this current period.

As always, our advisers are on hand should you have any queries in relation to your investments.

Stuart Niman – Latest Blog Posts

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