Combined action by world's banks

"China, Britain and Europe say they moved independently"

I don't know which "truth" would be worse here. If they did act together and are lying about it (quite likely), it signals desperation on a titanic scale. If they just happened to act independently and with such coincidental timing, each of these central banks is signaling that they see more bad news on the horizon, maybe even something big and ugly that we commoners aren't privy to. Either way, the perception of panic permeates. This will be an interesting week for the markets. - Wes Miller, CollapseNet

Rate cuts shake global confidence

China, Britain and Europe say they moved independently

SMH,

7 July, 2012

COMBINED actions of central banks on Thursday night to stimulate growth in regions that represent more than a third of the global economy served only to undermine investor confidence, prompting fears the outlook may be worse than many suspected.

Markets around the world sank after central banks in China, Europe and Britain signalled a determination to spur on growth, through either a round of rate cuts or a huge cash injection. The actions - over a space of 45 minutes - were all the more significant because they were not co-ordinated.

Australia's benchmark, the S&P/ASX 200 Index, opened sharply lower but ended the session down 11.4 points, or 0.3 per cent, at 4157.8. Wall Street's Dow Jones fell 0.4 per cent during Thursday's session. Markets in Japan and Hong Kong yesterday traded lower but closed above their lows.

Currency markets also responded sceptically to the actions, particularly to the European Central Bank rate cut, with Europe's single currency, the euro, falling against the US dollar and the Australian dollar.

Early yesterday, the Aussie hit a record high of 83.18 euro cents, but last night had eased back to 82.88 euro cents.

The wave of interest rate cuts in China, Europe and Britain had a slight effect on expectations for rate changes in Australia, with investors continuing to bet the Reserve Bank has more to do. Futures markets see a 25 basis-point cut as a slightly better than even chance next month, and rates are tipped to fall by 75 basis points over the next year. Such a move would take the Australian cash rate to a low of 2.75 per cent.

The Reserve Bank this week opted to keep the official cash rate on hold at 3.5 per cent after taking the view that after eight months of rate cuts totalling 1.25 percentage points, it was time to wait for a clear reason to move rates in either direction.

However, the central bank still has concerns about the strength of the Chinese economy.

Stephen Koukoulas, a former prime ministerial adviser, said Thursday night's cuts highlighted the fragile state of the world economy. China, Europe and Britain were significant drivers in the global economy, which was a critical long-term influence on Australia.

''You've got a third of the world economy seeing that growth conditions are not improving enough to keep monetary policy steady,'' said Koukoulas, who is now an independent economist.

''The world's still easing, and easing pretty appreciably, so we will probably keep easing somewhat more. There are more rate cuts ahead for sure.''

Others were less certain about the rates outlook for Australia. ''Whilst policy easing was the order of the day offshore, the statement from the July RBA board meeting raised the prospect that Australia's central bank may have done enough, for now,'' said Commonwealth Bank chief economist Michael Blythe.

The Bank of England began this week's global stimulus push, announcing it would restart buying bonds as it raised its bond buying target by £50 billion ($A76 billion), taking the program to £375 billion in an attempt to pull its economy out of recession. In making the decision, the Bank of England kept its base interest rate at 0.5 per cent.

The bond-buying program is essentially the pumping of money into the financial system in the hope of encouraging lending.

Within minutes of the Bank of England's announcement, 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. China's benchmark one-year lending rate fell by 31 basis points to 6 per cent and the one-year deposit rate dropped by 25 basis points to 3 per cent.

Given China is essentially driving Australia's resource boom, the outlook for growth through its economy could have a significant impact here.

HSBC head of Asian economic research Qu Hongbin expects Beijing to implement more measures to stimulate growth, such as lowering banks' reserve ratios and more fiscal spending.

''Once these measures filter through, China's growth should recover to around 8.5 per cent in the coming quarters,'' he said.

Nomura's chief China economist, Dr Zhang Zhiwei, said the interest rate cut showed Beijing was continuing with much-needed reforms.

''Cutting the lending rate by more than the deposit rate could further squeeze bank interest rate margins,'' Zhang said. ''Interest rate deregulation is important to encourage banks to become more commercial in order to properly price risk.''

The European Central Bank announced a further easing of monetary policy, taking its base rate down by 25 basis points to 0.75 per cent, the lowest on record.

ECB president Mario Draghi said he was optimistic about the long-term benefits of steps announced last week by European leaders to bolster the eurozone. But the near-term outlook was more gloomy.

''We see now a weakening basically of growth in the whole of the euro area, including the country or the countries that had not experienced that before,'' Draghi told a news conference after the rate cut. As a bloc, the EU is the biggest single contributor to the global economy.

Reaction to this week's measures were subdued.

''Markets are seemingly worried about what the policy easings suggest about the pace of global growth,'' said ANZ senior economist Amber Rabinov.

Indeed, Rabinov expects more stimulus programs, including further efforts by Chinese authorities to increase bank lending and possibly another 25 basis-point cut by the European Central Bank.

While EU interest rates remain near the critical zero rate, Draghi suggested more could be done to spur growth. ''We still have all our artillery ready,'' he said.

Still, the ECB's downbeat assessment of the eurozone's prospects sent Spanish bond yields back to dangerous levels.

The cost of Spanish government borrowing rose to near 7 per cent. Italian borrowing costs also climbed, trading near 6 per cent, a level considered unsustainable.

The actions by each central bank come just weeks after the US Federal Reserve announced it would extend its bond-buying program until the end of the year and the International Monetary Fund cut its growth forecast for the US economy.