As I See It: Terry Murden
Interest rate cuts are back on the agenda as part of the arsenal of weapons aimed at tackling the economic damage caused by coronavirus. The Fed has moved first and one former member of the Bank of England’s monetary policy committee thinks it may be next. But is it the right solution?
The Fed’s move to cut its baseline interest rate range by 0.5 percentage points to a 1% to 1.25% spread gave a lift to bombed-out stock markets, but amid some scepticism about the timing of the decision.
Normally markets would surge, but Wall Street’s initial reaction was less than enthusiastic. The Dow Jones index, the main American stock market index, fell nearly 3%.
President Trump wasn’t happy either. He wants the Fed to go further, claiming the US is still uncompetitive at the new rates.
However, some commentators said the Fed had gone too early. While it took the decision as a pre-emptive strike, there was some concern that it has left little room to respond should the effects of the virus become really serious.
In London, questions are being asked about whether cutting what are already rock bottom interest rates would make any difference.
It may ease pressures on cash management, but the problem is not the cost of money, it’s the flow of money.
The virus is disrupting trading markets and supplies, and could force many employees to work from home – that’s if they’re not sick. Businesses fear they won’t have enough components and that markets will be more difficult to reach. An interest rate cut will do nothing to ease those problems.
More useful measures would be easing the costs of trade, suspending tariffs and duties, extending tax reliefs, providing cheap emergency loans, helping with any additional medical costs associated with the virus, and offering compensation to those who are likely to see heavy losses.
This is a specific challenge to business and it requires a similar response.