Publication date: 5 March 2020 | Covering: February 2020
Monthly Briefing
- BREAKING: Fed emergency cut March 3: -50bps to 1.00–1.25%; first emergency move since 2008; COVID risk cited
- COVID-19 spreads beyond China through February; Italy, Iran, South Korea emerge as major clusters
- US equity markets: worst week since 2008 in final week of February; S&P 500 down 11% peak to trough
- Fed January 28–29 held at 1.50–1.75%; pre-crisis assessment; economy “in good shape”
- BOJ rate at stable pre-pandemic level; Jamaica economy performing well; tourism season strong
- NHT individual ceiling J$6.5 million; rates 0, 2, 4 per cent; mortgage market pre-pandemic conditions
Federal Reserve Emergency Cut: A Warning Signal
In a significant and alarming development, the Federal Reserve made an emergency inter-meeting cut of 50 basis points on 3 March 2020 — just two days before this edition’s publication — reducing the federal funds rate to 1.00 to 1.25 per cent. The move, the first emergency inter-meeting rate action since 2008, was explicitly linked to the COVID-19 outbreak and its potential impact on the US and global economy. Chair Powell held an unusual press conference to explain the decision, noting that the Committee had seen a “material change in the outlook” and that the cut was intended to provide insurance against the downside risks posed by the virus. Powell was careful to note that monetary policy could not directly address supply disruptions caused by the virus, but that the Fed had acted to support financial conditions and boost confidence.
The emergency cut sent an unmistakable signal to financial markets that the Federal Reserve viewed the COVID-19 risk as serious enough to warrant pre-emptive action. The FOMC’s January 28 to 29 meeting, held in what now appears a more sanguine pre-crisis moment, had maintained the federal funds rate at 1.50 to 1.75 per cent with a broadly positive economic assessment. In the six weeks between that meeting and the March 3 emergency action, the global outbreak had transformed from a primarily Chinese problem into an accelerating global emergency. For Jamaica, the Fed’s emergency cut marks a pivotal shift in the global monetary environment: the policy normalisation that the Fed had cautiously pursued through 2018 is now in sharp reversal, with the direction of travel toward zero rates driven by an external shock of unknown duration and severity.
COVID-19: From China to Global Emergency
Through February 2020, COVID-19 spread beyond its initial Chinese epicentre to establish significant footholds in Italy, Iran, and South Korea. Italy’s outbreak, concentrated initially in the Lombardy region in northern Italy, grew with alarming speed through the second half of February, prompting the imposition of quarantine zones around affected municipalities and the cancellation of major public events including the Venice Carnival. By early March, Italy had recorded thousands of cases and hundreds of deaths, with its healthcare system beginning to come under severe pressure. South Korea and Iran had similarly large outbreaks. In the United States, the first instances of community transmission — spread with no identifiable international travel link — were confirmed in late February in California and Washington state, raising alarm that the US was further along in its outbreak than official case counts suggested.
Financial markets reacted to these developments with the sharpest weekly decline since the 2008 financial crisis, with the final week of February producing an approximately 11 per cent decline in the S&P 500 as investors processed the pandemic risk. Credit markets also showed stress, with corporate bond spreads widening and risk appetite declining across asset classes. For Jamaica, the COVID escalation creates a rapidly deteriorating external environment. The island’s heavily tourism-dependent economy is acutely vulnerable to any disruption to international travel. At the time of writing, Jamaica has not reported confirmed COVID cases, but the trajectory of the global outbreak makes it a matter of when rather than whether the island will be affected.
Jamaica’s Mortgage Market: Pre-Pandemic Conditions
As of February 2020, Jamaica’s mortgage market was operating in conditions that are already being superseded by events. The Bank of Jamaica’s policy rate, while not at the pandemic-era emergency low that the Fed’s action is now heralding, was at a level supportive of competitive commercial mortgage offerings. The winter 2019 to 2020 tourism season was proceeding well, with visitor arrivals ahead of the prior year and the sector’s recovery from the September 2017 hurricane season long complete. The NHT’s J$6.5 million individual loan ceiling and subsidised rates of 0, 2, and 4 per cent were supporting solid demand for affordable residential purchase. The labour market was recovering, remittances were strong, and household confidence was positive.
The mortgage market enters March 2020 with a cloud of uncertainty that is unlike anything since the 2008 financial crisis — and in some respects potentially more severe in its implications for the tourism-dependent Jamaican economy, given the virus’s direct impact on travel. The days and weeks ahead will be critical in determining the scale of the economic disruption that Jamaica and its mortgage market will have to navigate. The BOJ’s response to the evolving situation will be an important determinant of domestic financing conditions.
Looking Ahead
The trajectory of the COVID-19 outbreak over the next 30 days will be the overwhelming determinant of the economic and policy outlook. The Federal Reserve’s March 17 to 18 scheduled meeting may see further rate action, and markets are already pricing in significant additional easing. For Jamaica, the government’s COVID preparedness and public health response will be a central concern. The spring break tourism period and the approaching end of the winter season create near-term economic exposure that the rapidly evolving global situation is placing at direct risk. This review will be monitoring the COVID situation and its implications for the mortgage and housing market closely.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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