Banks are seeking to spur world economies

Published: Tuesday, July 17 2012 12:17 a.m. MDT

European, U.K. and Chinese central bankers all acted to improve economic conditions in the past several days.

Mario Draghi, European Central Bank president, stated, "There wasn't any coordination that went beyond the normal exchange of views on the state of the business cycle. …"

Various interest rates were cut by the European Central Bank. The interest rate the European Central Bank pays to banks that leave money with it overnight was cut to essentially 0 percent. Such a low interest rate is intended to motivate these European banks to lend money to each other, at a rate currently about 0.30 percent. By encouraging these banks to lend to each other, liquidity is injected into the banking system.

Additionally, the European Central Bank cut its primary benchmark interest rate from 1 percent to 0.75 percent. Overall, this decrease of only 0.25 percent may not materially affect the borrowing costs for many consumers. This symbolic decrease in rates indicates the ongoing concern about the health of the European economies.

Chinese central bankers joined the European central bankers and cut certain key interest rates. The People's Bank of China, China's central bank, lowered a few important interest rates. A benchmark deposit interest rate was lowered 0.25 percent. China's one year lending rate was cut 0.31 percent. Each of these moves indicates, like the message coming from Europe, concerns about the economic outlook.

Central bankers have a range of tools at their disposal to enhance economic activity. In the case of The Bank of England, the key interest rate was not changed this time. Instead, The Bank of England chose to push additional funds into the system through asset purchases. This is a process very similar to what the U.S. Federal Reserve has done in its various quantitative easing programs. One of the stated goals of these easing initiatives is to increase the supply of money in the system and thus decrease interest rates.

Whether coordinated or not, these various easing activities by three significant central banks at essentially the same time underscore a common concern that the global economy continues to slow and additional monetary action is needed to help nudge these economies in a positive direction. Further action by the U.S. Federal Reserve to provide system liquidity and lower some targeted interest rates would not be surprising, given these actions by the U.K., Europe and China.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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