Central banks step in to halt slide

A summary of actions by top central banks in the wake of COVID-19 outbreak:

- Mohan

COVID-19 will in near certainty create a major global recession and this means that governments must continue to harness both monetary and fiscal policies to soften the blow. In response to this crisis, governments and central banks all over the world have enacted fiscal and monetary stimulus measures to counteract the disruption. The central bank actions take 3 forms - reducing interest rates on safe assets by lowering rates paid by the central bank on its own liabilities and by buying more government bonds, an action also known as quantitative easing; lending freely to banks and other financial institutions; and in their capacity as financial sector supervisors, encouraging financial institutions to extend credit to firms adversely affected by the crisis.

Here are some of the important policy interventions some of the top central banks have initiated:

US Federal Reserve: The Fed as early as on 3 March made an unscheduled cut in the rates by 0.5%, double the amount of its recent moves, and the largest cut since the 2008 financial crisis. On 12 March it massively expanded reverse repo operations, adding $1.5 trillion of liquidity to the banking system. Then it again cut interest rates by a full percentage point, down to a range of 0.00% to 0.25%. It also restarted quantitative easing (QE) with the purchase of $500 billion in treasuries and $200 billion in mortgage-backed securities. Then as part of a transition to a different type of bank reserves system, it lowered reserve requirements to zero, effective 26 March. It also encouraged banks to use their capital and liquidity buffers to lend, which are funds kept in reserve for tough times.