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Central Banks Deliver 45-Minute Salvo as Growth Weakens

July 05, 2012

Central Banks Deliver 45-Minute Salvo as Growth Weakens

The European Central Bank in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

Global central banks went on the offensive against the faltering world economy, cutting interest rates and increasing bond buying as a round of international stimulus gathers pace.

In a 45-minute span, the European Central Bank and People’s Bank of China cut their benchmark borrowing costs, while the Bank of England raised the size of its asset-purchase program. Two weeks ago, the Federal Reserve expanded a program lengthening the maturity of bonds it holds and Chairman Ben S. Bernanke indicated more measures will be taken if needed.

“The actions had the look and feel of a coordinated global easing campaign,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The central banks are trying to arrest the synchronized slowdown in global economic growth that has taken shape.”

Almost five years since the financial crisis first forced them into action, policy makers are reacting anew as Europe’s debt crisis persists, U.S. hiring slows and emerging markets soften. The jury is out on whether the additional monetary medicine will work or if even more will be needed.

The steps by the U.K. and euro area pushed JPMorgan Chase & Co. (JPM:US)’s average interest rate for developed economies to a crisis- era low of 0.48 percent and will add to the balance sheets of major central banks, which have already swelled 40 percent since mid-2007.

“Some policy makers may be at the limits of their influence,” UBS AG (UBSN) economist Paul Donovan wrote in a research report today.

First Push

The Bank of England began today’s stimulus push, announcing it would restart buying bonds two months after stopping. Governor Mervyn King and colleagues raised their asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds, meeting the forecast of most economists, in a bid to pull its economy from recession. They said output will likely remain sluggish after contracting in the past two quarters.

Within a minute of that decision, the People’s Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs. The one-year lending rate will fall by 31 basis points to 6 percent and the one-year deposit rate will drop by 25 basis points to 3 percent effective tomorrow. Banks can offer loans of as much as 30 percent less than benchmark rates.

Chinese Data

The world’s largest emerging market is acting more aggressively to spur growth that may have decelerated for a sixth quarter. Officials responded after two manufacturing indexes fell in June and ahead of a report on second-quarter gross domestic product, due on July 13.

“Policy makers have had an early look at the June data and didn’t like what they saw, suggesting the economy is weaker than they previously thought,” said Mark Williams, Asia economist at Capital Economics Ltd. in London.

At 1:45 p.m. in Frankfurt, the ECB then cut its main rate by 25 basis points to a record low of 0.75 percent and said it will no longer pay anything on overnight deposits as sovereign debt turmoil threatens to drive the 17-nation euro economy into recession. Both actions were anticipated by economists.

While ECB President Mario Draghi again questioned the economic impact of lower interest rates, they could make it easier for banks to borrow and lend as well as build on the confidence boost euro-area governments delivered last week when they moved toward a deeper economic union. He said today that the central bank is not “running low on policy options,” without elaborating on what else it may do.

Kenya’s Cut

Elsewhere, Kenya’s central bank cut its benchmark lending rate for the first time in 18 months and Denmark’s lowered its main borrowing costs to record lows.

U.S. and European stocks retreated as optimism over U.S. jobless claims data fizzled after Draghi said economic risks remain. The S&P 500 declined 0.8 percent as of 10:07 a.m. in New York, while the Stoxx Europe 600 Index fell 0.7 percent. Treasuries rose, with the 10-year yield falling 4 basis points to 1.587 percent.

Draghi told reporters that risks to the outlook remain “on the downside” and that heightened uncertainty is hurting confidence. Asked if there was any coordination with other central banks before today’s announcements, he said there “wasn’t any communication beyond the normal exchange of views.”

Operation Twist

Today’s shifts come after the Fed expanded its Operation Twist program on June 20 to lower longer-term interest rates in financial markets. Data tomorrow is forecast to confirm the weakest quarter for U.S. employment in more than two years, evidence the world’s biggest economy has lost momentum.

The central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel also cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling.

Bank of Japan officials meet next week to review their forecasts with Governor Masaaki Shirakawa today pledging to pursue appropriate policy as the bank promotes powerful easing.

Forcing central bankers’ hands is the weakest patch of global growth since the end of the 2009 recession, which has been mainly caused by Europe’s debt woes. All but three of the 26 economies monitored by JPMorgan will see inflation undershooting their central banks’ targets by the end of the year, according to New York-based economist Joseph Lupton.

Policy Coordination

Monetary policy makers have been at the forefront of efforts to insulate economies from the crises that began to rage in August 2007. They have sometimes acted together, most famously in October 2008 when they cut interest rates in unison. Last year they intervened to check a soaring yen and six of them made it cheaper for banks to borrow dollars in emergencies.

It remains to be seen whether the additional measures can bolster growth. UBS’s Donovan said the crisis has damaged so- called monetary transmission mechanisms such as the ability of banks to pass on easier central bank policy.

The ECB cut will have little impact on its economy and officials may have to consider quantitative easing if growth fails to improve in the second half of the year, said Julian Callow, chief international economist at Barclays Plc. (BARC)

Joy Yang, chief economist for greater China research at Mirae Asset Securities (HK) Ltd., said lower interest rates won’t support Chinese demand much and investors would prefer to see fiscal stimulus and economic reforms.

As for the Bank of England, Tom Vosa, director of economic research at National Australia Bank, said the U.K. economy is so stressed that 90 percent of the money the central bank is injecting could end up in risk-free assets or reserves.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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