Central Banks Move to Fuel Economy on 3 Fronts By KEITH BRADSHER and MELISSA EDDY
In the span of less than an hour on Thursday, China’s central bank and the European Central Bank cut interest rates and the Bank of England stepped up its economic stimulus program.
While the moves were not coordinated, they emphasize the concern financial officials have about a global economic slowdown and highlight the role central banks are playing in seeking to bolster growth.
China’s central bank unexpectedly cut regulated bank lending rates by nearly a third of a percentage point and made a rule change that could reduce borrowing rates for companies with good credit by an additional three-fifths of a percentage point.
Just four weeks earlier, the central bank, the People’s Bank of China, announced a similar rate reduction and rule change. The moves underline the growing worries in Beijing about what the government has begun to describe as a sharp economic slowdown.
In Frankfurt, the European Central Bank cut its benchmark interest rate to its lowest level ever in what may be its most aggressive move yet to unblock the flow of credit and prevent further deterioration of the euro zone crisis.
Most analysts expected a cut, but its scale appeared to disappoint investors looking for a more aggressive move. The major stock indexes in France, Germany and Italy all fell sharply after the move.
The E.C.B. cut its benchmark rate to 0.75 percent from 1 percent, which was once regarded as the lower bound on the official rate. With interest rates now close to zero, the bank and its president, Mario Draghi, will have a dwindling selection of conventional monetary policy tools they can use to combat the crisis.
In London, the Bank of England stepped up its economic stimulus, announcing an increased bond-buying program intended to jolt the struggling British economy out of a double-dip recession.
The central bank left Britain’s benchmark interest rate unchanged at a record low of 0.5 percent, apparently concluding that quantitative easing, which involves buying government bonds to increase available capital, was a more effective measure to lift the economy.
In Beijing, the central bank reduced the regulated rate for one-year bank loans by 0.31 percentage points, to 6 percent.
At the same time, it said banks would be allowed to charge as little as 70 percent of the regulated interest rate to good customers; the previous minimum, set a month ago, had been 80 percent. And until the initial rule change early last month, banks had been required to charge at least 90 percent of the regulated rate, even to their best customers.
On Thursday, the central bank also lowered the regulated minimum interest rate that banks must pay depositors. But the reduction in deposit rates was smaller, a quarter of a percentage point.
The smaller change in deposit rates is the latest sign that Chinese banks have found themselves lately in the unfamiliar position of struggling to persuade Chinese households and companies to deposit more money. A variety of trusts and other investment vehicles have become popular in China as savers have begun to rebel at very low regulated deposit rates, which will fall to a minimum of 3 percent for one-year certificates of deposit with the changes announced on Thursday evening.
China’s central bank provided no explanation for its moves, which take effect Friday morning. But the initial reaction of private sector economists was that the rate cuts represented a signal of genuine worry by Chinese decision makers
“This aggressive policy action reflects, in our view, a deepening concern by policy makers that the economy has yet to find a bottom and requires additional stimulative monetary settings to engineer a recovery,” Nick Chamie, an economist at RBC Dominion Securities, wrote in a research note.
Much as top Federal Reserve officials receive advance warning of economic statistics in the United States, Chinese policy makers have almost certainly received at least a rough preview of second-quarter economic statistics scheduled for release next week. Most economists now expect those figures to show considerably weaker-than-usual growth, at least compared with China’s vigorous expansion over most of the last three decades.
The interest rate reduction coincides with an emerging consensus that inflation, widely seen in China as the paramount danger to the economy last summer and perhaps even a threat to social stability, no longer poses much of a challenge. While annual inflation at the consumer level peaked at 6.5 percent at the consumer level last July, it has decelerated so sharply since then as the economy has slowed that it reached just 3 percent in May; the consensus forecast of economists is that when the government announces on Monday the inflation rate for June, it will show just 2.3 percent.
Few economists worry that the Chinese economy will stay weak if the Chinese government decides to mount a sustained stimulus effort. In contrast with the West, much of the current slowdown in China is the result of the government’s hitting the brakes too hard last year, through a national credit squeeze engineered to slow inflation and a series of bans on real estate speculation to make housing more affordable.
European officials face a greater concern about growth.
The European Central Bank’s president, Mr. Draghi, said Thursday’s interest rate decision was based on indications that growth in all 17 of the countries using the euro had shown signs of slowing. But he sounded upbeat about the potential long-terms benefits to the euro zone of steps agreed to by the bank and European Union leaders last week to address the underlying causes of the region’s debt crisis.
“We welcome the move to take action to address financial market tensions, restore confidence and revive growth,” Mr. Draghi said of the leaders’ plans, which would include giving the E.C.B. a new role as a centralized supervisor of the region’s banks to ensure more financial discipline throughout the bloc.
The interest rate cut is likely to increase speculation that the central bank’s next step to contain the crisis will be huge purchases of government bonds, similar to the quantitative easing undertaken by the Federal Reserve.
“The E.C.B. is aware that cutting rates to their lower bounds is likely to fuel market expectations that an outright Q.E. launch will follow shortly after,” Jens Sondergaard, an analyst at Nomura, said in a note to clients ahead of the rate decision.
A big increase in such bond buying might help contain borrowing costs for Spain and Italy and prevent those countries from becoming insolvent. But huge bond purchases would probably meet with outrage in Germany and threaten the unity of the euro zone.
Many Germans fear that they will bear a large share of the burden if the central bank suffers losses on its bond holdings and needs to ask for more capital from euro zone countries.
The E.C.B. also cut the rate it pays on deposits, which may help discourage banks from hoarding cash. Healthier banks have been parking record sums at the central bank, preferring to earn a meager 0.25 percent interest rate than to risk lending excess cash to their peers.
The E.C.B. cut the deposit rate to 0 percent, also a record low. But it is unclear whether that will do anything to restart the interbank money market, which in good times is a crucial source of short-term financing for banks. Banks may simply keep the money in their own vaults now that there is no incentive to deposit it with the E.C.B.
Britain’s decision to add £50 billion, or $78 billion, in additional stimulus comes on top of £325 billion already pumped into the economy by the Bank of England over the last several years.
Britain’s banking crisis wrecked government finances, prompting London to embark on its biggest austerity program since World War II. The economic outlook has been worsened by the crisis in the euro zone economy, which has sapped global confidence and decreased demand in major trading partners.
George Buckley, chief British economist at Deutsche Bank in London, said the impact of the new spending would be equivalent to adding 0.5 percent to gross domestic product.
But he cautioned that the overall impact on the economy would be limited, given the difficulties confronting other European economies.
“This is helpful at the margins, but the big issue is what happens to the European economy as that will be transmitted across the English Channel,” he said. “£50 billion in quantitative easing is not going to solve the problems. All the Bank of England can hope to do is to offset some of the headwinds from Europe.”
Stephen Castle and Jack Ewing contributed reporting.
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