The European Central Bank, Bank of England & People’s Bank of China – 3 Central Banks cuts rates & breathe life into deteriorating economies. Will the U.S. Federal Reserve be far behind now? The Fed QE3 will soon be on its way, albeit with a new name.
Europe: The ECB – European Central Bank cut interest rates to a record low and said it won’t pay anything on overnight deposits as the sovereign debt crisis threatens to drive the euro region into recession. The European Central Bank lowered the main refinancing rate to 0.75% from 1%, as predicted & also cut its deposit rate to zero from 0.25% and its marginal lending rate to 1.5% from 1.75%. The reduction in borrowing costs shows the European Central Bank is ready to support the flagging economy.
The European Central Bank’s loosening of policy followed shortly after China and Britain did similar. European Central Bank President Mario Draghi will explain the Governing Council’s decision at a 12.30 GMT news conference. ECB was under pressure to ease monetary conditions with Europe’s debt crisis curbing growth across the continent and damping the global outlook. A deposit rate of zero may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the European Central Bank’s overnight deposit facility. About 800 billion euros ($1 trillion) is currently being deposited with the European Central Bank each day.
Cutting the benchmark rate will lower the cost of ECB loans. The European Central Bank has lent banks more than 1 trillion euros for three years in its so-called (LTRO) Longer Term Refinancing Operations, with the interest determined by the average of the benchmark rate over the period of the loans.
ECB is unlikely to announce any further “non-standard measures” – bond purchases or ultra-long loans – after already loosening its lending rules on June 22. It will want to see the impact of that step before tweaking the framework.
England: Central banks around the globe are easing policy in response to Europe’s debt crisis, which has pushed at least seven euro nations into recession and forced five of them to seek bailouts. The Bank of England (BoE), which has been drawn into the scandal over Barclays Plc’s rigging of Libor rates, today kept Interest rates unchanged but raised its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds.
China: A lot of people were surprised when China cut benchmark interest rates for the second time in a month and allowed banks to offer bigger discounts on their lending costs, stepping up efforts to reverse a slowdown. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective tomorrow, the People’s Bank of China (PBOC) said on its website today. Banks can offer loans of as much as 30 percent less than benchmark rates.China is acting more aggressively to promote growth that may have decelerated for a sixth quarter as Europe’s turmoil crimps exports and domestic property restrictions curb the housing market. China had cut interest rates last month for the first time in three years.Source : Bloomberg