Central Banks Make Moves To Boost Economic Growth
According to Reuters, the European Central Bank cut its benchmark interest rate to an all-time low of 0.75 percent, while China cut its corresponding rate from 6.31 to 6 percent. The Bank of England opted for a new round of a quantitative easing plan, in which the bank will print £50 billion and use it to purchase financial assets.
Of the three, China's was the unexpected move, coming just one month after it had set the previous rate, which had marked the country's first reduction since 2008. This aggressive action by China, which has long been reluctant to loosen the supply of money due to fears of inflation, signals real concerns about growth.
While the timing of these three decisions raised suspicions of coordinated action, this was downplayed by officials in Europe. As the Financial Times reports:
"Markets had expected the ECB’s cut and a Bank of England decision to pump an additional £50bn of new money into the economy. The Chinese decision follows recent declines in growth indicators in the world’s second-biggest economy and surprised markets.
Mario Draghi, ECB president, speaking at his monthly press conference following the ECB’s decision, said the central banks’ moves were taken independently."
Equity investors had anticipated action from Europe and England, but they appeared to be disappointed with the degree to which the ECB in particular was willing to go to stimulate the economy in the wake of last week's European summit and a seemingly ongoing flow of disappointing reports from the eurozone. According to Business Insider:
"The story really started very early Wednesday morning when Germany announced that its services PMI number unexpectedly fell from 51.8 in May to 49.9 in June. A reading below 50 signals contraction in the industry. The worrying report out of Europe's largest economy had people thinking that the European Central Bank (ECB) would take some aggressive and unconventional policy measures to help bolster the eurozone economy.
Unfortunately, the ECB didn't ease monetary policy as much as some had hoped. The central bank cut its benchmark interest rate by 25 basis points to 0.75 percent. Meanwhile, the euro tanked and European markets got clobbered."
With the European benchmark interest rate approaching zero and the eurozone economy still facing serious concerns, some wonder whether quantitative easing is next. However, one key roadblock in such a plan is the fact that while quantitative easing undertaken by the Federal Reserve or Bank of England involves the central bank of a country assuming risk to loosen that country's financial markets, a European version has international political concerns. As the New York Times reports:
"A big increase in such bond buying might help contain borrowing costs for Spain and Italy and prevent those countries from becoming insolvent. But huge bond purchases would probably meet with outrage in Germany and threaten the unity of the euro zone.
Many Germans fear that they will bear a large share of the burden if the central bank suffers losses on its bond holdings and needs to ask for more capital from euro zone countries"
According to Bloomberg, banks in peripheral eurozone countries like Spain and Italy in particular felt the heat, as investors did not believe today's actions were enough to instill confidence in those capital markets.
Read more of Neon Tommy's coverage of the eurozone here.
Reach Executive Producer Matt Pressberg here.