Central banks free up US dollar liquidity amid coronavirus pandemic

Written by Ruby Hinchliffe
17th March 2020

The central banks of England, Canada, Japan, Europe, Switzerland and the US have teamed up to help tackle market instability in the global economy caused by the ongoing coronavirus pandemic.

As well as cutting interest rates to near zero and pledging billions of dollars in asset purchases for US banks, the US Federal Reserve has offered cheap dollar financing to fellow central banks around the globe, Reuters reports.

“The new pricing and maturity offerings will remain in place as long as appropriate,” says Bank of England

By lowering the price on the US dollar liquidity swap arrangements by 25 basis points, those central banks outside the US can provide better liquidity on the US dollar, which often regarded the world’s strongest currency.

The central banks will also start offering US dollars weekly in each of their jurisdictions with an 84-day maturity, which is in addition to the one-week maturity operations currently offered.

The changes, which commence this week, make it easier for the central banks to provide dollars to financial institutions facing difficulties in credit markets.

The Bank of England said in a statement: “The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of US dollar funding markets.”

“I think this is the start and not the full scope of what we’re going to see,” president of MacroPolicy Perspectives and former Federal Reserve economist Julia Coronado tells Reuters, hinting at other emergency lending tools to come in the short-term corporate credit markets.

Federal Reserve chairman Jerome Powell said at a conference on Sunday that the epidemic had already had a “profound” impact on the world’s economy, forcing entire industries such as travel and leisure offline.

“The economic outlook is evolving on a daily basis and it is depending on the spread of the virus,” says Powell on why quarterly economic forecasts have been called off for now. “That is not something that is knowable.”

The Federal Reserve is also encouraging US banks to keep credit flowing to businesses and families by tapping trillions of dollars in equity and liquid assets that it has built up to act as a capital buffer for the country since the financial crisis.