“They came out on a united front”: why did world central banks begin to cut interest rates simultaneously

The US Federal Reserve, as well as the central banks of some of the largest developing countries - Brazil, India and Russia - began to lower their rates. Experts note that such a policy has already become a trend in the global economy, which is being picked up by more and more central banks from different countries.

Analysts explain the new course of regulators by the slowdown in the global economy. In its latest forecast, the IMF lowered expectations for global GDP growth in 2019 from 3.3% to 3.2%, and in 2020 - from 3.6% to 3.5%. Such data are contained in the organization’s July report. It is significant that the economists of the fund worsened the assessment of world economic growth this year for the fourth time in a row.

“Recently, the IMF released a report on the economic situation in the world, which partly explains this trend. One of the reasons for the slowdown in GDP growth is low consumer demand and low investment activity. Therefore, it was recommended that central banks lower base rates slightly in order to spur both demand from the population and investment activity of the business, ”explained Alexander Abramov, head of the laboratory at the Institute of Applied Economic Research, RANEPA.

Abramov added that lower rates lead to lower bank interest on loans. As a result, the population receives loans cheaper, takes them more and accordingly consumes more. At the same time, deposit rates are also reduced, which encourages people to save less, since income from money lying in the bank is reduced. The same goes for business - loans are becoming more affordable, which allows companies to increase investment.

In a conversation with RT, Finam Group analyst Sergey Drozdov said that what is happening is reminiscent of the situation in 2008-2009, when world central banks also acted as a united front - they began to lower rates, gave financial funds to the markets and announced a program to buy toxic assets. True, eleven years ago, regulators "thought too long" and entered the process quite late.

“The next cycle of world economic growth, which began after the failure of 2008-2009, is coming to an end. Apparently, this time the world central banks decided not to wait for the crisis and are trying their best to prevent it, ”says Drozdov.

The difficulties in the global economy are also indicated by the JPMorgan Global Composite PMI. The IHS Markit analytical agency noted that despite a slight increase in July from 51.2 points to 51.7, this figure for the twelfth consecutive month remains below the long-term average of 53.7 points.

In addition, business activity in the global manufacturing sector has been declining for the third month in a row and dropped to 49.3 points, the lowest level since October 2012.

Let us explain that the index value above 50 points indicates a positive economic situation, below this mark - about the stagnation of the sector.

Uncertainty insurance

The chief analyst of BCS Premier Anton Pokatovich believes that the US Federal Reserve System, the European Central Bank, as well as the Central Bank of China and Japan will play the main role in the process of cutting rates.

The leadership of the US Federal Reserve on July 31 lowered the rate by 25 basis points to 2-2.25% per annum. The last time the American regulator lowered it back in December 2008. Meanwhile, in 2018, the Federal Reserve raised the base rate four times and in December planned two increases for 2019.

The decision of the regulator became a kind of insurance against a possible slowdown in the US economy as a result of a global slowdown and uncertainties in trade policy. This is stated in the accompanying statement by the head of the Federal Reserve Jerome Powell.

The European Central Bank (ECB) at a meeting on July 25 did not change the rate, but announced the possibility of easing its policy in the future. The rate will remain at the current or lower level until at least mid-2020, the ECB said in a statement. Explaining the regulator’s decision, its chairman Mario Draghi drew attention to the possible slowdown in the eurozone economy in the third quarter of this year.

Sergei Drozdov noted that the European regulator had to abandon previous plans to raise interest rates amid worsening economic conditions in some European countries, primarily in Germany and Italy. At the same time, the expert believes that easing monetary policy will not greatly help the European economy.

“The ECB rates are already at negative values, the only positive point is that the regulator is considering launching another quantitative easing program, during which the ECB usually buys assets from the market and thereby provides them with additional liquidity. The ECB did this in 2008-2009, and this is a more effective way than reducing the size of the interest rate, ”said Drozdov.

The Central Bank of China has kept its rate unchanged (4.6%) since August 2015. The monetary authorities of the PRC believe that this is an appropriate level. This was stated by the head of the People’s Bank of China And Gan, Reuters reports citing the Chinese edition of Caixin.

Sergei Drozdov noted that despite the rate being maintained, the People’s Bank of China is also participating in the general easing policy, as it actively provides the necessary funds to its own market.

“The Central Bank of China softens the conditions for access to the money of Chinese corporations through various preferential programs. If the world economy is on the verge of a crisis, there is no doubt that the Chinese regulator will also act as a united front along with other world regulators, ”Drozdov predicts.

Earlier, the Bank of Japan kept the rate at the current negative value - minus 0.1%, but also softened its rhetoric. Haruhiko Kuroda, chairman of the Japanese central bank, said that the regulator could take additional measures to soften its policy if economic growth does not reach target values, Xinhua News Agency reported.

Sergei Drozdov did not rule out that a reduction in the interest rate by the Bank of Japan could be a signal to other countries about a significant deterioration in the situation in the global economy.

Big win

Interviewed by RT experts believe that the policy of world central banks will be able to partially support the growth of world GDP.

Anton Pokatovich believes that the actions of regulators can give the global economy an additional 0.2-0.4 percentage point of growth.

Without the support of central banks, world GDP will add about 2.8-3% in 2019, says Sergey Drozdov. At the same time, if the world Central Banks continue the policy of easing, economic growth can reach up to 3.1-3.2%.

Alexander Abramov believes that Brazil, India and Russia can benefit most from easing monetary policy, whose regulators have proceeded to actively reduce key rates, and at a much more aggressive pace than the Fed. The expert did not rule out that only through easing monetary policy, developing countries can get an additional 0.5-1 percentage point to GDP growth.

Thus, the Bank of Brazil reduced the rate from 6.5% to 6%, thereby updating the historical minimum. The Bank of India lowered its interest rate by 35 basis points to 5.4% per annum, the lowest level in nine years. At the last two meetings, the Central Bank of Russia also lowered its key rate from 7.75% to 7.25% per annum.