Dollar soars after central banks in China and Europe slash rates

The People’s Bank of China and the European Central Bank have both lowered interest rates in a move which Australian economists say is intended to confront a growing economic slowdown.

The Australian dollar reacted immediately, hitting a two month high overnight and trading at US1.0279 cents at 10.30am this morning, up from US102.68 cents on Thursday.

The People’s Bank of China cut the one-year yuan lending rate by 0.31 percentage points and the one-year deposit rate by 0.25 percentage points, marking the second time in a month that China’s interest rates have been lowered.

The European Central Bank cut its key interest rate to a record low of 0.75% to boost a eurozone economy weighed down by the continent’s sovereign debt crisis.

European leaders last week agreed on new steps to strengthen market confidence in their shared euro currency bloc.

They set up a single banking supervisor to keep bank bailouts from bankrupting countries and made it easier for troubled countries to get bailout help.

Those steps helped calm financial markets, which have expected the ECB to follow up with more help in the form of a rate cut.

The Bank of England also moved to shore up the slowing global economy by increasing its quantitative easing stimulus policy by £50 billion ($76.39 billion) to boost Britain’s recession-hit economy.

The BoE said it was also keeping its main interest rate at a record low 0.50% following a two-day monetary policy meeting.

Paul Bloxham, chief economist at HSBC, told SmartCompany it looked like there had been “some co-ordinated support” from central banks across the world in the last 24 hours, which was a helpful development in supporting global growth.

“The Chinese interest rate cut is particularly relevant for Australia, we are still expecting the policy measures will be enough to see growth in China pick up in the second half of the year, this is one of the steps along the way,” says Bloxham.

“It will support commodity prices going into the second half which is key for Australia’s growth prospects.

“They are positive developments and it looks like there will be more to come, in particular we are expecting more from China.”

Bloxham says the outlook for the Australian economy is good as the Reserve Bank has already moved to cut rates.

“I think the RBA is ahead of the game, they have cut interest rates already in the face of weakening global conditions. We expect a little more from the RBA this year, but the Australian economy is well placed to grow in the second half of the year,” he says.

Warren Hogan, chief economist at ANZ, told SmartCompany the interest rate cut in China was particularly important as China was the only major world economy that still has policy flexibility.

“The fact they are using it is good news for the world and particularly Australia,” he says.

“It is going to put pressure on our currency in an upward direction and that will happen because these policy initiatives are aimed at taking pressure off those exchange rates.

“It also hopefully means better growth outcomes for the world economy and, ultimately, if currency goes up and up it can put downward pressure on interest rates.”

Hogan says he did not think the global cuts were co-ordinated, rather the ECB agreement last week had been a “line in the sand” after which central banks acted.

“If it was co-ordinated half the benefit of doing it would have been to announce it as such, I think it is just timing,” he says.