hero image

China has continued to feel the effects of the outbreak of the coronavirus, and the world will be looking at the country’s central bank to save the day. However, it seems not even the rate cuts or other measures of easing are likely to save the day.

Peoples Bank of China announce rate cuts

Since the 2008 financial crisis, central banks such as the People’s Bank of China have been bailing out financial markets and economies. Such banks, such as the European Central Bank and the US Federal Reserve, have been helpful in situations of crisis. Some of the weapons that have been employed to curb the recurrence of episodes include interest rate cuts.

On Monday, the PBOC announced that it will put 1.2tn Yuan into its financial system as it tries to cushion its economy from the impact of the coronavirus outbreak. The central bank indicated that this move will ensure there is an able currency, and there is considerable and adequate liquidity in the banking system.

This reverse repo program and corresponding rate cuts will be handy to the economy that is already showing signs of slowing. Under the program, the central bank will buy various securities from investors who want ready cash to avert a wave of forced selling as investors get back from the Lunar New Year break.

Measures will do little to offset slowing economic activity

The coronavirus outbreak also comes at a bad time for the country that is almost facing economic uncertainty. This is an instance that shows that pulling the plug on monetary policy might not be enough. According to Capital Economics markets economist Hubert de Barochez, the measures announced by PBOC will not on their own put the economy back on track. Barochez holds that the cuts will do little to offset the slowing in economic activity following the response of authorities to ban travels and closure of businesses.

The central bank also announced over the weekend additional credit and support to institutions and hospitals battling the virus. They pleaded with financial institutions to offer adequate credit resources to medical research institutions and hospitals.