ASIC and Reserve Bank of Australia step in to try calm plunging markets

ASIC Reserve Bank of Australia RBA ASX stock market plunge coronavirus covid19
ASIC has limited the number of shares that can be traded, as the RBA readies its bond buying program.

It is probably not a great sign but Australian regulators including the Reserve Bank and the Australian Securities and Investments Commission (ASIC) have been extremely active as the Australian share market continues to suffer the biggest falls in its history.

It is a similar situation overseas with the extraordinary volatility caused by the reaction to the COVID-19 virus forcing the hand of regulators and central banks.

In Australia it is now widely expected that the RBA might pre-empt its April board meeting with an emergency interest rate cut from the current 0.5% to 0.25% or even 0%.

RBA Governor Dr Philip Lowe announced that it would offer more and longer repurchase operations to ensure smooth functioning of credit markets and will make further announcements on Thursday.

That is a way to allow companies to get instant liquidity that can be repaid when markets become less turbulent.

ASIC moves to reduce transaction volumes

At the same time the ASIC asked major traders to reduce the number of trades by 25% which saw trading volumes of 3.3 million on Monday.

That is down from an extraordinary 5.1 million transactions last Friday.

Overseas, the US Federal Reserve slashed its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least US$700 billion.

US Fed Chairman Jerome Powell told a quickly arranged telephone press briefing on Sunday that the COVID-19 virus disruption to lives and businesses meant that second quarter US growth would probably be weak and it was hard to know how long the effects would last.

US Fed cuts rates to zero

“We do know that the virus will run its course and that the US economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit.”

The Fed really pulled out the big guns, cutting its key rate to 0-0.25%, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015.

The Fed also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to 0%.

In a co-ordinated action with five other central banks, the Fed also ensured US dollars are available around the world via swap lines.

Still not keen on negative interest rates

Despite bringing the US to the edge, Mr Powell said that he did not think negative rates such as those being used in Europe and Japan, would be appropriate policy in the US.

President Donald Trump, who has consistently attacked the Fed for not lowering rates faster and further, congratulated the central bank on the move.

The action has done little to promote much confidence in the economy as businesses quickly scale back their activities in the wake of social isolation to cope with the virus, threatening a recession.

Goldman Sachs has already slashed its GDP forecasts to zero growth in the first quarter and a 5% contraction in the second.

The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The Fed has already stepped in to repurchase large numbers of bonds to enhance liquidity but pressure in the US and around the world is now falling on governments to boost their spending to support the economy.

Most economists believe the stimulus being offered by central banks will not be enough to fight the effects of COVID-19.

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