By Richard Barley
Welcome to rate-cut city.
The People's Bank of China, the European Central Bank and the National
Bank of Denmark all cut rates Thursday, and the Bank of England
delivered an additional 50 billion British pounds ($77.95 billion) of
so-called quantitative easing through bond buying.
The moves look coincidental rather than coordinated. But they speak to
grave disquiet among global policy makers. The question is whether
monetary policy will achieve much at this point. Stocks fell,
suggesting investors have their doubts.
The Chinese rate cut--the second in less than a month--perhaps stands
the best chance of working via traditional monetary-policy channels.
That country's central bank cut its one-year deposit rate by 0.25
percentage point to 3% and its one-year yuan lending rate by 0.31
point to 6%.
The moves suggest that next week's second-quarter growth data may be
weak, and look like a pre-emptive attempt to support growth above the
country's 7.5% target as China moves toward a once-in-a-decade
political transition. With inflation falling, China still has room to
ease. A cut in the reserve- requirement ratio, freeing up cash for
banks to lend, could be the next step.
For Europe, the outlook is bleaker. The ECB cut its key rate to 0.75%,
moving below 1% for the first time in its history, and lowered its
deposit rate to zero. The hope might be that banks that have stashed
790.9 billion euros ($989 billion) with the ECB would now deploy it
elsewhere. But ECB President Mario Draghi noted it couldn't affect
banks' lack of risk appetite, ameliorate their lack of capital or
boost demand for credit.
The ECB's move also triggered a cut in Denmark, since the krone is
pegged to the euro, and that took Danish deposit rates to an
unprecedented minus 0.2%. In the long term, negative interest rates
may lead to problems with the functioning of the banking system, as it
is more attractive to hold cash physically rather than leave it in the
bank.
Meanwhile, the BOE boosted total gilt purchases to GBP375 billion. It
is difficult to see what benefit further purchases might bring; at
1.65%, U.K. 10-year yields are close to record lows already. In the
U.S., markets will await June jobs data due Friday to see if the
Federal Reserve may join the global party when it meets at the end of
this month.
In many developed economies, the monetary-transmission mechanism,
whereby reductions in official rates filter through to juice demand,
is broken. Very low rates may even be an impediment to growth, as they
signal how poor the outlook is and squeeze those on fixed incomes.
Despite rates that have been negative in real terms for years now, the
BOE noted that U.K. output had barely grown for 18 months, while the
ECB acknowledged that the whole euro-area economy was being damaged.
Thursday's rate cuts and bond purchases are an understandable response
and may not be the last.
But--perhaps with the exception of China--they look increasingly
subject to diminishing returns.
Write to Richard Barley at richard.barley@dowjones.com
(END) Dow Jones Newswires
July 05, 2012 14:25 ET (18:25 GMT)
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