Just a day after the European Central Bank hinted at more quantitative easing in the nearest future, the People Bank of China surprisingly cut its interest rates. What does it imply for the global economy and the gold market?
China’s central bank cut its one-year benchmark lending rate by 25 basis points to 4.35 percent and the one-year benchmark deposit rate by 25 basis points to 1.5 percent, the lowest level in history. It also cut the required reserve ratio by 50 basis points to 17.5 percent. The PBOC reduced its interest rate for the sixth time this year to support the economy, which is slowing down (according to the official data released a week ago, China’s economy grew 6.9 percent in the third quarter, the slowest pace since 2009). The cuts will provide about $140 billion in additional liquidity to the Chinese investment market.
Global stock markets welcomed a new monetary stimulus, hoping that it would improve the country’s prospects. Although it may give a slight boost to the economy in the short-run, it will not affect the country’s long-term economic outlook. The reason is simple: China’s financial sector is already excessively indebted. Moreover, the link between China’s interest rates and economic growth is somewhat looser then in developed markets. Additionally, given capital controls, this new liquidity injection may not spillover to foreign markets.
The cuts are just another signal that Chinese economy is slowing down. This deceleration will drag on the worldwide economy. According to Credit Suisse’s survey, 47 percent of 60 top managers of European managers said that they had already postponed investment projects due to worries on China. The fewer investments there are, the slower the economic growth in the future. Thus, with a weaker global economic outlook, a Fed hike this year is becoming less likely, which is good news for the gold market.
The bottom line is that China cut interest rates for the sixth time this year. Financial markets welcomed the PBOC’s action (and this is probably why the price of gold actually declined after the announcement), but it will not stop the serious economic slowdown. The cuts signal that China’s economy is decelerating faster than anticipated, which will drag on the global economy but support the price of gold in the long run.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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