As many have expected, China is now aggressively combating its seemingly inevitable economic downturn. The country's central bank, the People's Bank of China, decided this morning to cut its interest rates for the sixth time in less than a year. After underwhelming quarterly data was reported earlier this week, the PBoC joined several of its peers in steering monetary policy in a more accommodative direction to try and spur inflation and stimulate a stagnant economy.
Economic Easy Street
With deflation and slowing economic growth still a major concern for China (and, by extension, the global economy), the PBoC decided to ease its monetary policy basically across the board. The one-year benchmark rate for interbank lending was cut by 25 basis points (0.25%) to 4.35%, while reserve ratio requirements for banks was lowered by 50 basis points. The one-year benchmark deposit rate was also lowered by 25 bp down to 1.50%.
The central bank chose to adjust its rates lower yet again due to disappointing third-quarter data. Q3 economic growth was clocked at 6.9%, just above expectations but just below the PBoC's target of 7 percent. Nonetheless, if you can believe it or not, it was still the slowest quarterly expansion for the Chinese economy since 2009.
The data wasn't all terrible: the consumer price index (CPI) did rise, an encouraging sign for inflation possibly picking up. However, producer prices (PPI) actually deflated for the 43rd consecutive month. Despite the CPI picking up slightly, prices on the wholesale side were 5.9% lower year-on-year. According to Econoday, this "[reflects] excess supply of housing materials and raw materials and overcapacity in heavy industry." Consumer prices are also still lagging some 50% behind government targets.
The People's Bank is now open to using essentially every tool at its disposal in order to kick-start economic growth. Frederic Neumann, who co-heads the economic research division of HSBC's Hong Kong operations, characterizes the moves as "stepping on the gas." He says that "[t]he joint move on interest rates and the reserve-requirement ratio shows that Beijing is determined to get the car out of the mud and get things moving again."
Analysts at Capital Economics see another rate cut occurring before the year ends.
In response, the yuan advanced to a 2-week high against the dollar, firming up to 6.35/$. The euro slid to a 2-month low of about $1.105, while equities around the globe moved into the green.
Bank of Japan
China is joining Japan and the European Union in moving toward easing monetary policy. The country's Finance Minister, however, believes that the Bank of Japan needs to do more than just add more quantitative easing.
“Prices aren’t rising in Japan not because of a lack of money, but because of a lack of demand,” Japanese Finance Minister Taro Aso said on Friday to reporters. “The economy is fine, but looking at inflation, the effect of a halving of oil prices has been pretty huge.”
Japan has struggled perhaps more than any developed economy in the world to stoke inflation. The peak reading for inflation in Japan was 1.5% during the tenure of Bank of Japan Governor Haruhiko Kuroda, who has embarked on aggressive QE measures that China pales in comparison to. Inflation data fell back into deflationary territory below 0% this August.
There is a divergence in global monetary policy between those loosening policy (China, Japan, Europe) and those supposedly on the path toward tightening it (the U.S. and U.K.). Most people expect more easing to be announced by the BoJ at its next policy meeting a week from Friday. Meanwhile, the European Central Bank (ECB) is facing the same pressure to boost its QE program to stimulate growth in the likewise sluggish Eurozone.
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