Global Crunch: Central Banks Anemic Response
Justin Burkhardt | July 5, 2012
In an effort to prop up the global economy and mitigate further loss from the EU spillover, Central banks around the world swung into action over night. The European Central Bank (ECB) and People’s Bank of China announced this morning that they have just cut their rates, while the Bank of England increased the size of its Asset Purchase-Program. Could these measures instill investor confidence or is it too late?
The ECB has cut their rates by 25 basis points to record lows of 0.75 percent in order to revitalize the European Economy’s ever-dwindling state. However, Central Banks have refused to participate in more drastic measure that would expose them to further liabilities such as purchasing government bonds or re-capitalizing banks with fresh liquidity.
The rate-cut decision has done little to reinforce investor confidence as the Euro’s plunge continues, falling to a one month low. The overall outlook for the currency remains bleak as the debt crisis heightens.
China’s Central Bank acted unilaterally with the ECB cutting its one year lending cost by 31 basis points to 6 percent, the second rate cut issued since June of this year. This reduction came as a surprise, but the world’s second largest economy is seeking to bolster its weakening growth rate.
China is projected to grow at its slowest pace in 13 years. “Policy makers have had an early look at the June data and didn’t like what they saw, suggesting the economy is weaker than they previously thought,” said Mark Williams, Asia economist at Capital Economics Ltd. in London.
The Bank of England has also taken strides to pull its economy out of a recession by injecting its third round of monetary stimulus. The BofE has announced that they will begin printing $78 billion, which will be wholly used to purchase government bonds. This increases their bond purchase total to $546 Billion to date.
Can the EU Alter This Global Crunch?
Global markets are in reaction mode as the EU crisis continues to intensify. The European Union’s “fight for austerity” cannot produce the desired affect, and it is becoming increasingly obvious that the road traveled will ultimately lead to an unprecedented fate. The global economies of today are very much intertwined, and until EU countries recognize that this crisis demands reform rather than cutbacks, chaos will reign.
Editor & Currency Strategist
FXFocus.com | @JDBurkhardt
Disclosure: I have no position in any stocks mentioned, and no plans to initiate any position within the next 72 hours.