Central Bank Action in China and Europe

July 5, 2012
Both The People's Bank of China The European Central Bank have lowered their rates.

The People's Bank of China (China's central bank) lowered the benchmark one-year cost of borrowing money by 31 basis points to 6%. This is the second time in a month that the Bank has acted to stimulate the economy. This is probably a sign that the economy has slowed more than the official statistics let on. Based on history, China should be effective via this monetary policy in adding some vitality to its economy.

The European Central Bank (ECB) cut deposit rates 25 basis points to 0.75% in an attempt to get the eurozone turned around. This is the lowest rate yet sanctioned by the ECB. The deposit rate is what the Central Bank pays banks for overnight deposits left with the ECB. The reduction is an attempt to make holding cash less attractive. Sometimes this policy action is like pushing on a string because ultimately there must be demand pulling on the string in order for the process to work well. Consumers in Europe are showing a resiliency in their spending that is encouraging. What we need to see now are businesses willing to pick up their tempo regarding borrowing and investing. This is sometimes harder to do than stimulating consumer spending. However, within the context of the broader sovereign debt remedies being bantered about for Europe, we think the ECB made the right call at the right time.

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