Rate cuts: inevitable but pointless?

As expected, central banks are starting to cut interest rates in the hope of mitigating the economic impact of the COVID-19 virus.  The Reserve Bank of Australia, never quick to ease, cut its benchmark rate by 25 basis points earlier today, and the US Federal Reserve just weighed in with a 50 bp cut.  Others are bound to follow, and for the moment financial markets are breathing a sigh of relief.

However, as this article points out, it's unlikely that rate cuts can do much to prevent the global economy from slipping into a phase of negative growth.  Globalization over the past two decades, and in particular the shift of manufacturing activity to China, means that the COVID-19 outbreak there, even as evidence suggests the worst may be over, is having serious ripple effects across the world. Moreover, the rapid growth in global tourism in recent years has not simply come to a screeching halt, but gone sharply into reverse, with airline and cruise bookings plummeting.

If I take a look at my own small corner of the world, I can see only dire events ahead for the economy.  My own little town welcomes about 3 million tourists a year.  Niagara Falls, just down the road, gets closer to 20 million.  Every day from April to October, our expressways and main roads see convoys of buses from Toronto, the majority of them festooned with Mandarin or Korean script.  That will not be happening this year, and the effect on everything from souvenir shops to restaurants to wineries will be severe.

Or consider another bastion of our tourist offering, the renowned Shaw Festival. About 250,000 seats are sold each year, and most of the out-of-town visitors stay in hotels or B&Bs for at least one or two nights and eat out in our multitudinous restaurants. It's quite possible that the Shaw will be required to close for health reasons, and even if it isn't, a large number of potential playgoers will undoubtedly choose to forgo attendance this season out of an abundance of caution.

Look around the world and you can see signs of the same thing happening just about everywhere. For example the outbreak in Italy, the most severe outside Asia, just happens to have hit the northern part of the country, home to much of the vitally important tourist industry and to most of the manufacturing sector.  There really is nothing that central banks can do about this -- though, abiding by the  appropriately Hippocratic instruction to "first, do no harm", they have no choice but to make whatever efforts they can.

UPDATE, March 4: The Bank of Canada matched the Fed's move with a 50 basis point cut of its own this morning. This was a scheduled meeting day, but the Bank generally prefers to adjust rates only on days when it releases an updated Monetary Policy Report.  The next such report is due in April, so the fact that the announcement has come early, combined with the scale of the move itself, underscores the Bank's concern.