Data Point. The RBI isn’t alone

With many economies across the world on a weak wicket, interest rate cuts have been the flavour of the year. So far, fourteen central banks have slashed their policy rates. But there have been exceptions, too. Brazil and Ukraine, for instance, undertook rate hikes on inflation concerns. And others, such as the US Federal Reserve, are playing a wait and watch game.

Long-awaited cut

The People’s Bank of China sprang a surprise in November when it slashed its benchmark one-year lending rate by 0.4 percentage points to 5.6 per cent. It also cut its reserve requirement ratio this month.

Both the measures — the former which eases borrowing costs and the latter which injects more liquidity into the financial system — are aimed at stimulating a flagging Chinese economy. in the grip of a slowdown.

The two rates were last tweaked in 2012. Likewise, the Australian Central Bank slashed its cash rate (inter-bank overnight rate) by a tenth to 2.25 per cent early this month after maintaining status quo from September 2013. Falling global commodity prices and the slowdown in its biggest export market have hurt the economy. Taking markets by surprise, Russia too undertook a rate cut after raising rates by 6.5 percentage points in the preceding month to prop up the rouble. The Central Bank of Russia slashed the key policy rate by 2 percentage points to 15 per cent in January. Russia, which is among the world’s leading oil exporters, has been hurt by falling crude oil prices.

Sanctions imposed by the US and the EU too have had an impact. While the rate cut could boost growth, it has resurrected inflation worries, which is already in double-digits.

Doing it differently

With near-zero interest levels in the euro zone, the European Central Bank recently unveiled a quantitative easing programme involving €1.1 trillion worth of bond buying. A weak euro, an outcome of the increase in money supply, would be supportive of growth.

But with inflation taking precedence over growth in Brazil and Ukraine, these central banks chose to jack up policy rates to tackle price rise. Brazil raised the selic rate by 0.5 percentage points to 12.25 per cent in January and Ukraine tightened the discount rate by 5.5 percentage points to 19.5 per cent in February. The inflation rate in Ukraine has risen sharply and hit 28.5 per cent in January. Increases in administered prices and currency depreciation have been stoking inflation in Ukraine.

COMMENT NOW