Europe, China lower rates in urgent effort to spur recovery
By Michael Birnbaum,
BERLIN — Central banks around the world took major steps Thursday to stave off fears of global recession, with the European Central Bank slashing interest rates, China unexpectedly cutting bank lending rates and the Bank of England pumping billions of pounds into Britain’s stimulus program.
The measures reflect a growing sense of international urgency about faltering economies and underline the continued power of central banks to take unilateral measures to fight the crisis, even as elected policymakers haggle over their own long-term responses.
But in Europe, concerns grew that the ECB was reaching the limits of its capacity to head off catastrophe through ordinary policymaking means. Should the crisis worsen, the bank appears to have few tools ready to do more on a short-term basis.
The bank announced that it was reducing its benchmark interest rates to a record low 0.75 percent, down from 1 percent — a move that will make borrowing cheaper and could stimulate the sputtering national economies that share the euro currency.
“The risks surrounding the economic outlook for the euro area continue to be on the downside,” ECB President Mario Draghi said at a news conference in Frankfurt. Some of those risks “have materialized,” he added.
The moves in Europe and Asia sent mixed signals as to what the U.S. Federal Reserve might do in coming months. On the one hand, they could increase pressure on the Fed, revealing as they do the intensifying concerns about the global economy. On the other, the could bolster growth in those regions, lessening the burden on the U.S. central bank to act.
After the interest-rate announcement, European markets dropped and the value of the euro fell sharply against the dollar, down almost 1.2 percent from Wednesday. In the United States, the Dow Jones and Standard & Poor’s 500-stock index were down slightly, while the NASDAQ was flat.
The ECB also dropped the interest rates for its overnight-deposit facility to zero percent, down from 0.25 percent, in a bid to encourage banks to lend to each other rather than parking their money with the ECB, as well as to reduce money-market rates.
The ECB held back from more unconventional steps to take pressure off troubled countries, such as resuming the purchase of their debt, and Draghi said there were no plans to change that. He sounded pessimistic about whether major measures — such as renewing the program to extend long-term refinancing to banks, as the ECB did late last year — would work, saying: “It’s not obvious that there are measures that can be effective in a highly fragmented area.”
But analysts said the bank would soon be out of traditional ammunition and could be forced to turn to more politically controversial measures.
“We are reaching the point where we need something new to keep this going,” said Jens Sondergaard, a senior economist at Nomura.
In Beijing, the People’s Bank of China cut interest rates for the second time in four weeks, lowering interest on one-year loans to 6 percent and saying that banks can discount rates by as much as 30 percent below that benchmark, an increase from a 20 percent allowable discount. Analysts — who had expected a rate cut, but not until later this summer — said the changes probably reflect uncertainty about China’s second-quarter growth.
In Britain, the Bank of England announced that it was expanding its stimulus program by $78 billion, bringing the total to $585 billion, another sign of fear on the part of central banks about slumping European economies. Although Britain does not use the euro, its central bank has in recent weeks taken steps to pour money into its economy in an attempt to forestall recession.
“What we are seeing is clearly a reaction to the fact that the growth picture internationally is deteriorating,” Sondergaard said.
Draghi said the bank actions were not coordinated.
Many economists have called on the U.S. Federal Reserve to do more to spur U.S. growth, especially as the economies in Europe and Asia slowed down, buffeting the American economy. It has responded with only modest steps, concerned about triggering uncontrollable inflation.
Cutting interest rates, as Europe and China did Thursday, is not an option for the Fed, which has held interest rates near zero percent for several years. But the U.S. central bank has other tools available, including initiating a third round of asset purchases, which can drive interest rates on a range of lending lower, and other public commitments to keeping interest rates low for an extended period.
So far this year, the Fed has said it plans to keep interest rates near zero through at least 2014. Last month, it said it would extend a program geared at keeping long-term rates low through the end of the year.
The Fed has coordinated with foreign central banks in the past, but as Draghi noted, there was no such coordination Thursday.
The ECB change had been expected after euro-zone leaders took major new steps at a summit in Brussels last week to forge a stronger shared financial system and ease the terms under which countries can use bailout money. The bank’s decision, made unanimously by its directors, appeared to again walk the tightrope between reducing the possibility of immediate economic catastrophe while leaving enough undone that Spain, Italy and others must still pursue measures to make their finances more sustainable.
That approach shifts Europe’s crisis response from the equivalent of defusing a live bomb to a more protracted, ongoing negotiation that will last for years. The euro zone has already held on since late 2009. But major risks remain. On Thursday, Spain held a bond auction at which it found enough buyers for its debt but paid higher rates than last month. Its 10-year bonds averaged a yield of 6.43 percent, up from 6.04 percent at the last auction on June 7.
Draghi had in recent months condemned elected leaders for not proceeding with bold steps to unify Europe’s disjointed economies. Last week’s summit agreement gave new powers to the central bank, giving it oversight over the euro zone’s biggest banks and making it even more key to Europe’s path out of crisis.
On Thursday, Draghi praised that outcome, saying that “the leaders have committed substantial political capital into this decision.” He took special care to highlight the unanimity of the rate decision, with the implication being that budget-hawk Germany is sufficiently satisfied with Europe’s situation to acquiesce to a historic easing of the money supply, a step it ordinarily would strenuously oppose.
But controversy persists in Germany. The influential Frankfurter Allgemeine Zeitung daily, long linked to the country’s economic establishment, published a letter signed by 160 German-speaking economists condemning the decisions made in Brussels.
Chancellor Angela Merkel, in Berlin, rejected their criticisms, telling reporters Thursday that “this is about better banking supervision.”
Merkel added: “One can only say that that is urgently necessary.”
Many analysts nevertheless questioned whether the lowered interest rates would have anything more than a symbolic effect on the euro-zone economy, which earlier this week saw its unemployment rate rise to the highest level since the common currency was created in 1999. With interest rates already so low, the bank’s ability to sway the economic situation by cutting rates further is limited.
Zachary Goldfarb in Washington contributed to this report.
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