Federal Reserve officials, who less than two weeks ago vowed to keep interest rates on hold throughout 2020, are now signaling a chance that a more prolonged economic hit from China’s coronavirus could force policymakers to cut interest rates again.
There is now a high chance that the Federal Reserve will cut interest rates next month, according to experts.
The chance of the Fed cutting interest rates by 25 basis points from the current range of 1.5 percent to 1.75 percent jumped to 26.6 percent, up from 11.1 percent late Friday and 6.6 percent the same time last week, according to Investing.com’s Fed Rate Monitor Tool.
Federal Reserve chairman Jerome Powell had on Feb. 11 warned the Congress that the coronavirus could hurt the global economy.
"We will be watching this carefully," Powell testified before the House Financial Services Committee, where he delivered his semiannual report to Congress. "What will be the effects on the US economy? Will they be persistent? Will they be material? That's really the question."
Powell refrained from speculating about the potential economic impact of the coronavirus. But noted, "We know there will likely be some effects on the United States."
Investors raise ECB rate cut bets on coronavirus fears
In a sign of increased concern that the spread of coronavirus will hit the euro zone economy hard, euro zone money markets on Feb. 24 priced in around a 50 percent chance that the European Central Bank will cut interest rates by 10 basis points in July.
Italy raced on Feb. 23 to contain the biggest outbreak of coronavirus in Europe, sealing off the worst affected towns and banning public events in much of the north.
The difference between the overnight and forward Eonia interest rates - bank-to-bank interest rates for the euro area that provide some indication of how investors view the ECB rate trajectory - imply roughly a 50 percent chance of a 10-basis-point rate cut is factored in by July.
European Central Bank President Christine Lagarde had warned on Feb. 5 that the coronavirus outbreak has fueled economic uncertainty and could potentially damage global growth.
“While the threat of a trade war between the United States and China appears to have receded, the coronavirus adds a new layer of uncertainty,” Lagarde said at a conference in Paris.
“The short-term uncertainties are mainly related to global risks – trade, geopolitical and now the outbreak of the coronavirus and its potential effect on global growth,” she said.
As the novel coronavirus outbreak continues to batter China, the country's central bank said on Feb. 24 that it will launch new measures to counter the impact of the coronavirus outbreak in the country and implement its prudent monetary policy in a flexible manner.
The People's Bank of China said in a statement it would also reduce interest rates on loans to small and micro companies appropriately in order to prevent the breakdown of the flow of cash and capital flows into he market.
As for Turkey, the country's central bank said last week that it was “closely monitoring” the impacts that the coronavirus has on the “capital flows, foreign foreign trade indicators and commodity prices.”
It lowered the key interest rate by 50 basis points last week. The policy rate, also known as the one-week repo rate, dropped to 10.75 percent from 11.25 percent, the bank said in a statement issued after its second Monetary Policy Committee meeting of this year held on Feb. 19.
Coronavirus 'could cost global economy $1.1 trillion in lost income'
According to a leading economic forecaster, the coronavirus could cost the global economy more than $1 trillion in lost output if it turns into a pandemic.
Oxford Economics warned last week that the spread of the virus to regions outside Asia would knock 1.3 percent off global growth this year, the equivalent of $1.1 trillion in lost income.
Oxford Economics said it expected China’s GDP growth to fall from 6 percent last year to 5.4 percent in 2020 following the spread of the virus so far. But if it spreads more widely in Asia, world GDP would fall by $400 billion in 2020, or 0.5 percent.