Major Central Banks Act to Stimulate More Borrowing and Lending
Three of the world’s major central banks announced interest rate policy changes in the space of an hour yesterday. The ECB cut its benchmark interest rate to 0.75 percent, the lowest level in its 14-year history. China’s central bank unexpectedly cut regulated bank lending rates for the second time in four weeks. And the Bank of England said it would expand its holdings of government bonds by about 15 percent.
The actions once again cast central bankers in the role of primary responders to the global economic problems, aiming at the same basic goal that they have tried to hit repeatedly over the last six years: encouraging people and businesses to borrow and spend and take greater risks with their investments. The ECB also took action to try discourage commercial banks from hoarding cash and force them to lend again as a means of returning to profitability. This is recognition that a large problem with much of the monetary policies of the past can be thwarted by low levels of lending by commercial banks.
The eurozone and the UK are mired in economic recession and the United States is faring little better. Just last week, the city of Stockton in California filed for Bankruptcy protection. It is one of several US cities to have done so. And as the US faces another economic slowdown, policy makers have not yet succeeded in restoring public confidence that better days are coming.
The latest round of modest monetary measures is unlikely to result in an economic turnaround, especially if some domestic and retail banks fail to pass on the full value of interest rate cuts to their customers. To make matters worse, some of the central banks are fast running out of easy options on the monetary policy front.
Throughout history, central banks have often returned to tried and tested means of turning economies around. Printing money and quantitative easing have been some of the tools they have used as peacetime measures. The election of President Hollande in France happened at an important juncture in the ongoing sovereign debt debate in Europe. Perhaps it will be pivotal?
But back to the present. When three central banks begin singing from the same hymn sheet, this is cause for concern. Here in Ireland, surely the needs of individual banks must give way to the greater needs of society. Surely, passing on those rate cuts is the right thing to do. Additionally, increases in lending are vital, both here in Ireland and more broadly, across Europe. After all, central bank activity will only have limited success if local banks refuse to play ball.