Collaborated efforts count and matter. And when it comes to central banks, these efforts matter more. In times of irrational exuberance, efforts to put sand in the wheels help bring sanity to markets, and in challenging times such efforts can help boost sentiment.
Friday was one such day in the history of economics when the markets got boosters from three key economies of the world. The
European Central Bank (ECB) announced a 25-basis point cut in its main interest rate bringing it to a record low of 0.75 per cent from 1 per cent earlier. (A basis point is one-hundredth of one percentage point.) ECB, simultaneously, brought down the deposit rates to zero which would make parking surplus liquidity with ECB uneconomical for banks.
Closer to the
Eurozone, Bank of England announced the restart of its quantitative easing (QE) programme with a 50 billion pounds cash injection into United Kingdom's financial system which reflects the central bank's concern over easing inflation and declining growth.
And third booster came from The People's Bank of China which said in a statement that it has cut the one-year yuan lending rate by 31 basis points and one-year deposit rate by 25 basis points. The surprise move from Chinese central bank was second such move in less than a month. After the latest cut, China's benchmark lending rate stands at 6 per cent compared to 6.31 earlier while the benchmark deposit rate has come down from the earlier 3.25 per cent to 3 per cent.
Declining growth is an equal area of concern in India, but
Reserve Bank of India has stuck with its 'wait and watch' strategy before playing in to the global orchestra and cutting interest rates. Witness: RBI preferred to keep its June 18 mid-quarter monetary policy review a non-event even as markets expected it to cut interest rates giving that GDP growth fell to 5.3 per cent for the quarter ended March 2012 and recorded a relatively-tepid 6.5 per cent growth for financial year 2011/12.
PERSPECTIVE: RBI sounds caution on economy "The evolving growth-inflation dynamic will continue to influence the Reserve Bank's stance on interest rates," RBI said in its review statement. The central bank preferred to leave rates at the current levels
despite core inflation had moderated , reflecting demand conditions and lower pricing power. RBI's concern was that both headline and retail inflation rates were rising, which have a bearing on inflation expectations. "Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks," RBI said.
The annual rate of inflation, measured by wholesale price index (WPI), stood at 7.55 per cent for the month of May 2012 as compared to 7.23 per cent for the previous month. Similarly, the annual rate of inflation measured through consumer price index (CPI) was also higher in May 2012 at 10.36 per cent compared to 10.26 per cent in April.
SPECIAL: Why India needs to get its act together, quickly The presidential polls are currently a hurdle for any strong reforms from the government to tame the burgeoning fiscal deficit. The deficit is a repetitive concern which RBI has been highlighting as one of the reasons behind its inability to cut interest rates as a strategy to boost growth. Reacting to the triple booster from its global peers, RBI Governor D. Subbarao told reporters, in Chennai, that central bank is sensitive to inflation and committed to bring it under control. "We will continue to make all efforts," he said.
FROM THE MAGAZINE: Govt inaction behind poor growth indicators Leaving interest rates untouched is one such effort. But some promising steps from the government could propel RBI to take a rate-cut decision in its ensuing policy review on July 31. Until then, India is not likely to be part of the global orchestra.
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