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World central banks move to boost economic growth

July 6, 2012

FRANKFURT: Central banks moved to the frontline yesterday in the battle to head off the threat posed to the global economy by dwindling growth and the fragile mood prevailing in the financial

But despite the round of monetary measures announced by the European Central Bank (ECB), the Bank of England (BoE) and the Peoples Bank of China (photo below), the banks could come under renewed pressure in the coming months to launch new measures as global growth falters and the euro debt crisis remains unresolved.

While the ECB cut borrowings costs by 25 basis points to an historic low of 0.75% and the BoE pumped an additional 50 billion pounds (US$78 billion) into Britain’s economy, Beijing delivered its second rate cut in two months to lower its lending rate to 6%.

However, after cheering the central banks on in the buildup to yesterday’s meetings, financial markets went into reverse after the monetary authorities’ announcements, with their measures failing to sustain the rally that had emerged this week.

The benchmark Stoxx Europe 600 index finished the day down 0.2% with stocks in New York sliding and the euro off more than one percent at US$1.2389.

This was despite a measure of hope emerging from the US about the nation’s hard-pressed labour market. Figures released yesterday showed fewer Americans filed first-time claims for unemployment benefits and hiring by companies picked up.

But already there have been signs from the US Federal Reserve that it also stands ready to provide additional monetary easing if growth in the world’s biggest economy should disappoint.

In the meantime, uncertainty about how the global economy will perform in the coming months continues to emerge.

Analysts expect China’s economic growth rate to slip to about 7.6% in the second quarter from 8.1% in the first three months of the year.

“Today’s interest rate cut [in China] has increased the likelihood that the leading interest rates will be cut by more than 25 basis points before year’s end,” said Dankse Bank economist Flemming Nielsen.

Speaking at his regular press conference yesterday, ECB president Mario Draghi appeared to draw the line under further monetary action for the time being, saying that the bank’s governing council had not considered any further emergency measures to shore up investor confidence in the eurozone.

But Draghi also painted a downbeat picture of the eurozone economy, warning that growth in the currency bloc is “hovering around zero” and that “downside risks are materialising for the economic

Small relief

Analysts are, however, sceptical about what impact yesterday’s rate cut will have on the eurozone’s economic prospects.

“Given the already very low level of policy rates, the move [rate cut] will bring only small relief to the real economy – in the current difficult environment, however, small is better than nothing,” said
Marco Valli, chief eurozone economist with the Italian bank UniCredit.

Indicators released in the runup to yesterday’s ECB meeting showed economic confidence in the 17-member eurozone as measured by a European Commission’s closely watched survey falling to its lowest level in 32 months in June.

Analysts believe the ECB could be forced to announce more non-standard measures such as another round of cheap long-term loans if yesteray’s interest rate cut fails to help reverse the current slowdown in economic growth and to ease market tensions.

“Looking ahead, the room for further conventional easing seems limited, while new unconventional measures will crucially depend on the degree of financial stress in the system and the damage that this would cause to the transmission mechanism of monetary policy,” said Valli.

Analysts also do not believe that the BoE’s announcement that it was pumping more money into the British economy will be the end of the London-based monetary authorities push to underpin growth and shield the country from the fallout from euro’s debt crisis.

“The monetary policy committee’s decision to resume its asset purchases reflects a combination of easing inflation fears and rising growth concerns,” said Vicky Redwood, economist with the research group Capital Economics.

“We doubt that this 50 billion pounds of extra quantitative easing will be the last extension either,” she said.



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