A key interest rate has been cut to stimulate the economy. Sound
familiar?
It's becoming an old story, but this time there's a difference.
This time it could actually help the economy -- and maybe even
deposit interest rates.
What is the crucial difference? This time, the interest rate cut
occurred in China
.
Surprise move to pep up the economy
Unlike the U.S. Federal Reserve, the Chinese central bank has
not launched a new transparency initiative, and its meetings are
not highly-anticipated media events. So its recent announcement to
cut interest rates by 25 percent seemingly came out of nowhere, and
was a pleasant surprise for the financial markets.
China's move to cut rates is its first since the 2008/2009
financial crisis. As was the case back then, the decision was a
response to both global and domestic concerns, because even in an
economy still transitioning from communism, global and domestic
economic issues are closely intertwined.
Global growth matters to China because it is a major exporter.
When in the U.S. or Europe falter, China sees potential weakness in
key markets for its goods. Also, China has become a huge creditor
to the world. It holds the debt of the world's major economies, and
does not want to see that investment compromised.
Domestically, China needs growth to manage the transition of its
economy. As more and more of its people migrate from rural to urban
regions, it needs the type of job creation that will keep these new
concentrations of population productively employed. Handled
correctly, that type of growth can become self-sustaining, but
monetary policy can help smooth out any bumps along the way.
East is east and west is west
After interest rate cuts have failed to stimulate growth in the
U.S. and Europe, why should there be faith that rate cuts in China
will be any more effective?
The difference is that while consumers and many governments in
the western world are in debt, China is flush with savings, both at
the national and individual levels. Cutting interest rates to
encourage spending has done little good in the U.S. and Europe
because consumer are already tapped out. In China, however, cutting
loan rates
and savings account rates will encourage its people to spend a
little more of their savings and become a more consumer-oriented
society.
In other words, for cutting interest rates to act as stimulus,
there has to be an additional capacity to spend. This is more true
in China than in the West.
What's in it for bank rates?
Why might this help U.S. bank rates? Because stimulus in China
can help growth globally, without pushing bank rates lower in this
country.
So far, U.S. depositors have been asked to suffer low savings
account rates on faith. The premise is that if you accept
low bank rates
now, the growth they stimulate will allow those rates to rise
later. But after more than three years of waiting, U.S. depositors
have learned not to hold their breath waiting to get repaid for low
bank rates.
In contrast, when China lowers its rates, it shouldn't cause
U.S. rates to fall, but the stimulus that results may ultimately
help the U.S. economy -- and its bank rates -- recover. So this
time, things really may be different.