Cheap money hurting global growth prospects
With China slashing interest rates for the sixth time in a year last Friday, it seems that major economies around the globe are converging on monetary easing. However, cheap money, as an expedient measure to fight a financial crisis, has largely proved inadequate to address long-term challenges. An ultra-loose monetary policy did not save the Japanese economy from its lost decades nor did counterintuitive negative interest rates galvanize the eurozone into solid growth.
Worse, if global policymakers cannot promptly reach an agreement on how to exit from cheap money in an orderly way, the uncertainties caused by the on-and-off debate about when the United States will hike its near-zero interest rate may just be the tip of the iceberg.
The latest interest rate cut shows China’s central bank is heading in the direction of more easing. But it does not mean that the Chinese authorities are embracing the unprecedented policy of zero interest rates as manyWestern countries have.
Chinese monetary policymakers are only rising to the occasion as the country’s economic growth dipped to a six year low of 6.9 percent in the third quarter. The People’s Bank of China cut its benchmark one-year lending and deposit rates by 25 basis points each, to 4.35 percent and 1.5 percent respectively, effective from Saturday. By injecting some liquidity to help arrest the economic slowdown, China’s central bank is doing its necessary and conventional job.
Actually, the more noteworthy move by the PBOC last Friday was its decision to lift controls on deposit rates, a “significant milestone” in the country’s financial reform. Since China gave domestic banks freedom to set their loan rates in July 2013, the latest move has made China’s interest rates basically liberalized.
Such a bold step forward in financial reform bears full testimony to Chinese authorities’ resolution to press ahead with comprehensive economic reforms even as the world’s second-largest economy is struggling with structural inefficiencies and expanding at its slowest rate since the global financial crisis.