European Central Bank

Banks boost economies

PUBLISHED : Tuesday, 17 July, 2012, 12:00am
UPDATED : Tuesday, 17 July, 2012, 12:00am

With the economic climate in Europe and China deteriorating, central banks have intervened to pump more money into these economies.

The banks announced stimulus measures in rapid succession, acting on concerns over deteriorating global growth.

Analysts and strategists say that even though initially the equity market reacted negatively, the central banks' moves are a positive development for the global economy and risk assets.

The People's Bank of China (PBOC) moved swiftly and unexpectedly to lower benchmark interest rates for the second time in a month. Its one-year lending and deposit rates were cut by 0.31 and 0.25 percentage points to 6 per cent and 3 per cent respectively. The discount banks can give on lending rates was also increased to 30 per cent from 20 per cent to encourage more lending.

The PBOC's moves coincided with an announcement by the Bank of England (BoE) that it was adding GBP50 billion (HK$601 billion) of gilt purchases to its quantitative easing programme, as expected, taking the total to GBP375 billion.

The European Central Bank (ECB) followed soon after with a quarter-point cut in its key refinancing rate to 0.25 per cent, also in line with expectations.

All the central banks gave economic slowdown as the main reason for easing.

China's aggressive moves signalled the government's increasing concern about weakening growth and anaemic credit demand.

The BoE cited increased euro-zone risks and business indicators pointing towards further weakness both domestically and abroad.

Meanwhile, the ECB pinned its rate cut on downside risks to growth, including a slowdown in core European economy Germany, and falling inflationary pressures.

One analyst from a European research house says that while no additional unconventional policy measures were announced by the ECB, the deposit rate that commercial banks receive on their reserves at the ECB was cut from 0.25 per cent to zero.

With Euro1.1 trillion (HK$10.4 trillion) sitting on deposit at the ECB and now earning zero interest, the move is aimed at encouraging banks to lend more.

The analyst says that although the cut is welcome, it is unlikely to boost growth dramatically in the countries suffering most from the current slowdown.

Instead, the biggest benefit from the action is the signalling that the ECB stands ready to implement more policy measures should conditions deteriorate further.