Global central banks go on the offensive

European Central Bank and People’s Bank of China cut benchmark rates, Bank of England restarts asset-purchase programme

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 programme. They acted two weeks after 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.

SYNCHRONISED ACTION

European Central Bank

• Cuts main rate to record low of 0.75%
• Will not pay for overnight deposits

People’s Bank of China

 

• Cuts key interest rate for second time in a month
• Allows banks to offer bigger discounts on lending costs

Bank of England

• To end two-month freeze on bond buying
• Increases asset-purchase target by £50 bn to £375 bn

Central Bank of Kenya

• Cuts benchmark lending rate for first time in 18 months

Danmarks Nationalbank

• Lowers main borrowing costs to record lows

Early movers:

• US Federal Reserve expands programme lengthening the maturity of bonds it holds; Chairman Ben Bernanke promises more steps if needed
• Central banks of Australia, the Czech Republic, Kazakhstan, Vietnam, Israel cut rates in June
• Swiss National Bank buying euros to defend franc

“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 synchronised 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, US 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 Bank of England began Thursday’s stimulus push, announcing it would restart buying bonds two months after stopping as it tries to pull its economy from recession.

Governor Mervyn King and colleagues raised their asset-purchase target by £50 billion pounds ($78 billion) to £375 billion, meeting the forecast of most economists. They said the economy 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 and the one-year deposit rate will drop by 25 basis points effective tomorrow. Banks can offer loans of as much as 30 per cent less than benchmark rates.

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 pm in Frankfurt, the ECB also cut its main rate by 25 basis points to a record low of 0.75 per cent and said it will no longer pay anything on overnight deposits as it tries to prevent the sovereign debt turmoil from driving the 17-nation euro economy into recession. Both actions were anticipated by economists.

While President Mario Draghi has 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 on Thursday that the central bank is not “running low on policy options,” without elaborating on what else it may do.

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.

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

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 Thursday’s announcements, he said there “wasn’t any communication beyond the normal exchange of views.”

The steps by the UK and euro area will push JPMorgan Chase & Co.’s average interest rate for developed economies to a crisis-era low of 0.48 per cent and add to the balance sheets of major central banks, which have already swelled 40 per cent since mid-2007.

Thursday’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 US 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 on Thursday 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.

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. The Bank for International Settlements said last month that central banks are confronting the limits of their ability to aid recoveries and risk creating longer-term problems for their economies.