Central Banks Move to Boost Global Growth
Steps by China, ECB Lift Stocks, but Risk Lurks
By Jon Hilsenrath in Washington, Brian Blackstone in Frankfurt and Lingling Wei in Beijing
Nov. 21, 2014 7:45 p.m. ET
Two major central banks moved Friday to pump up flagging global growth, sending stock markets soaring but raising new questions about the limitations of a seven-year effort to use monetary policy to address economic problems.
The People’s Bank of China announced a surprise reduction in benchmark lending and deposit rates, the first cuts since 2012, after other measures to boost faltering growth fell short. Hours later, European Central Bank President Mario Draghi said the bank might take new measures to boost inflation, now near zero, his strongest signal yet that the ECB is getting closer to buying a broader swath of eurozone bonds.
The moves came less than two weeks after the Bank of Japan said it would ramp up its own securities-purchase program known as quantitative easing, or QE, as the Japanese economy fell into recession.
The twin steps Friday, half a world apart, sent global stock prices sharply higher, bolstered the U.S. dollar and boosted oil prices.
The Shanghai Composite Index rose 1.4%, while Germany’s DAX index jumped 2.6%. The Dow Jones Industrial Average finished up 0.51%, and at 17810.06 is now closing in on the 18000 threshold that has never been surpassed. The Nikkei rose 0.3%.
Amid the flurry of central bank activity, the dollar was the winner among global currencies, rising 0.27% against a broad index of other currencies to put it up 9% for the year.
Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix.
The steps, particularly in Europe, represent a subtle endorsement of the Federal Reserve’s easy-money approach to postcrisis economics, but come as the U.S. central bank shifts its own low-interest-rate policies. The Fed last month ended a six-year experiment with bond purchases, and it has begun talking about when to start raising short-term interest rates as the U.S. economy improves, though those discussions are early and rate increases are likely months away, at the earliest.
Global economic weakness creates a dilemma for the U.S. If the Fed pulls away from easy money as other central banks ramp up money-pumping policies, it could drive up the value of the U.S. dollar, straining U.S. exports. It also could put downward pressure on U.S. inflation and on commodities prices, which are typically denominated in dollars.
Eswar Prasad, a Cornell University professor and former International Monetary Fund economist, said those developments would make it harder for the Fed to move ahead on rate increases.
The latest actions suggest that policy makers in the major economies are growing more desperate as they confront weakening domestic prospects, particularly when soft global demand is weighing down prices and keeping inflation at levels many central banks consider alarmingly low.
“We cannot be complacent,” said Mr. Draghi in Frankfurt. “We have to be very watchful that low inflation does not start percolating through the economy in ways that further worsen the economic situation and inflation outlook.”
Annual inflation was running at 0.4% in the eurozone last month, far below the ECB’s 2% target, a sign of feeble underlying economic growth.
Mr. Draghi’s comments raised expectations the ECB might soon buy large amounts of corporate debt or government bonds of eurozone members. Bond buying is intended to hold down long-term interest rates and drive investors into riskier assets to stimulate borrowing, investment and spending. The practice is a challenge in Europe, where the central bank faces restrictions on its ability to purchase individual country debt.
Europe and Japan have similar problems: Flat-to-declining economic output that is pulling inflation down below 2% targets. China also is seeing a downward pull on consumer prices and outright deflation in its industrial sector, signs of an economy losing momentum, albeit from a much faster growth pace.
The Fed pursued low-rate, QE experimentation for half a decade. It pushed U.S. short-term rates to near zero in December 2008 and promised to keep them there for long periods.
Convinced that wasn’t enough, it then launched several rounds of bond purchases that helped push its portfolio of securities, loans and other assets from less than $900 billion to more than $4 trillion.
The policies didn’t cause the hyperinflation or obvious asset bubbles that some lawmakers and critics feared. The fact that the U.S. economy is now doing better than Europe’s or Japan’s suggests the policies helped boost growth, although the degree of support is a matter of great disagreement among economists.
Some observers have doubts about whether easy-money policies will work now in the places adopting them.
“Central banks have done about as much as they can,” said Liaquat Ahamed, author of “Lords of Finance,” which documented the mistakes global central bankers made before and during the Great Depression.
Japan, he said, is burdened by a highly inefficient domestic economy, and Europe by a fragmented and fragile banking system. Pumping cheap credit into these economies won’t directly fix those problems, he said. “They may be just copying the U.S. when they have different problems,” he said.
“The world has relied too much on central banks.”
In the U.S., Fed officials have been frustrated that they were being relied on to spur growth while the Obama administration and Congress feuded over fiscal policies that slowed growth in the short-run without addressing projected long-run budget deficits.
China is a different story. In developed economies, where growth is slower, short-term interest rates have already been pushed to near zero and central banks have employed unorthodox measures to boost growth. Rates in China are higher, leaving the central bank more room to reduce them if it wants to spur borrowing and spending.
China this year could miss its annual growth target of 7.5% for the first time since the 1998 Asian financial crisis. Economic output grew by 7.3% in the third quarter, its slowest pace in more than five years.
Until now, the People’s Bank of China, under longtime governor Zhou Xiaochuan , has resisted calls from within the government, the market and the corporate sector to cut interest rates. Officials feared that broadly opening the credit spigot would worsen China’s debt problems and put the economy at greater risk, according to officials at the central bank.
Instead, it tried to channel credit to sectors deemed important for China’s growth, including small and rural businesses and government-financed low-income housing projects.
On Friday, the central bank said it cut its benchmark one-year loan rate by 0.4 percentage point to 5.6%, larger than typical reductions of 0.25 percentage point. It also cut its benchmark one-year deposit rate by 0.25 percentage point to 2.75%.
The PBOC’s chief economist, Ma Jun, said Friday the risk of deflation, or falling prices, is putting “upward pressure” on inflation-adjusted, or “real,” interest rates, which contributed to the decision to cut benchmark rates now.
0 comments:
Publicar un comentario