As the world economy once again appears to be slamming on the brakes, central bankers around the world are now preparing for a new round of lowered interest rates as a measure to kickstart the economy.As the Wall Street Journal reports, many of these measures are complicated and rather extreme:
The European Central Bank cut a benchmark short-term lending rate to a record low 0.75% and reduced another rate that it pays banks to zero. The People’s Bank of China said it would cut a one-year yuan lending rate by 0.31 percentage point to 6%. The Bank of England—having already reduced short-term interest rates to near-zero—increased a bond-buying program by £50 billion ($78 billion), to £375 billion, in an effort to drive down long-term interest rates.
Some of these moves are even more radical: Denmark is effectively charging banks a negative interest rate to encourage more lending. Few other countries have gone quite as far, but more and more of the world’s leading economies are at least moving in that direction.These moves may be exciting to students of unconventional monetary policy, but in reality this is a sign of desperation. As the Journal notes, few analysts have much hope that these measures will succeed—interest rates are already near zero in many western countries—and international stock markets dropped upon learning the latest news about aggressive new banking measures. Investors now seem to believe that the world’s central-banks are running out of tools to fight slow growth.The only safe thing to say is that the world economy is now in uncharted territory. There has never been a moment like this before, and nobody, not even the heads of the worlds richest and most respected central banks, knows what the next step should be.