China’s recent decision to cut interest rates for the fourth time in eight months, allied with their powerful incentive to strike a balance between growth and adjustment, justifies a discussion of whether Zero Interest Rate Policies (ZIRP) may loom somewhere in Beijing’s future.
Recent rough weeks for China’s stock market and heavy losses in the Shanghai Composite Index ultimately pushed the central bank to cut interest rates. This unexpected move was aimed at providing more confidence to investors and boost the slowing economy.
There are many other policy options that China could implement to counteract the share market’s downturn and ones which Li Keqiang- Premier of the People’s Republic of China recently showed preferential interest in implementing.
He said: “China has a bunch of policy tools at its disposal. We will not opt for strong stimulus,” Right now, the global economy is in deep adjustment, and China’s development has entered the state of new normal. China will remain committed to targeted macro-regulation. It will make anticipatory adjustment and fine-tuning as proper, and be flexible in applying the host of policy tools”.
So for now all that we can conclude is that ZIRP can not be ruled out for the future. Only however might they become likely if a number of conditions emerge over the next two to three years.
First, GDP growth slows down further to reach approximately the 4% level.
Second, inflation remains at a low or negative rate.
Third, the government maintains its current debt management policy, which prefers liquidity support and rollovers to defaults and debt restructuring.
Time will tell…..
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