Governments in a Panic Mode: India and Poland Cut Rates as China’s Lowers GDP Growth Targets to 7%!

A few days back I wrote about the divergence between central bank actions and record stocks

Record high stocks have spawned an ocean of misimpression that such dynamic has been about G-R-O-W-T-H and the ebbing of risk.

But on the other hand, the rush to ease by many central banks extrapolate that these monetary institutions have seemingly been in a panic mode. Insufficient G-R-O-W-T-H has been exposing credit risks that have only been pressuring central banks to lower the cost of servicing debt through policies.

Two different responses to divergent perceptions.

Yesterday India’s central bank unexpectedly cut interest rates for the second time this year.

From the Wall Street Journal

RBI governor Raghuram Rajan explained his decision to cut rates ahead of the central bank’s next scheduled monetary-policy meeting in April, saying: “The still-weak state of certain sectors of the economy as well as the global trend toward easing suggest that any policy action should be anticipatory.”

With its latest move, the RBI joined a dozen central banks, from Singapore to Switzerland, which have cut rates since January to stimulate economic growth and stave off deflation. The People’s Bank of China lowered rates Saturday for the second time in less than four months.

But jumping on the easy-money bandwagon carries risks for India and other emerging markets. If the U.S. Federal Reserve starts tightening, developing economies could face large capital outflows…

Mr. Rajan said he moved in part because “disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged.”

Ah disinflation, euphemism for deflation risk. Too much debt which leads to depressed economic activities that subsequently heightens credit risk.

As I previously said, central bank creed of the euthanasia of the rentier will dominate the sphere of monetary policy making. This will be complimented by political pressures, social desirability bias and path dependency.

Last night Poland also jumped into the easing bandwagon.

From Reuters:

Poland ended its monetary-easing cycle on Wednesday with a deeper-than-expected rate cut intended to curb deflation and prevent excessive zloty gains as the euro zone begins a massive stimulus programme.

The central bank's Monetary Policy Council cut the benchmark rate 50 basis points to 1.50 percent, a record low. Most analysts polled by Reuters had expected a 25-basis-point reduction.

The zloty weakened after the decision, then reversed losses and gained up to 0.9 percent after the bank said its easing cycle was over.

"There is never a situation that the promise of the MPC in any country is carved in stone," Governor Marek Belka said. "But taking into account the current economic situation ... I cannot see room for further rate cuts and expectations thereof."

Belka said the European Central Bank's bond-buying programme was one factor leading to the reduction.

"If a major currency ... is a subject to a quantitative easing at a significant scale, then one can expect appreciation pressure at currencies surrounding the euro," he said at a conference following the decision.

Same dynamics with India but with an added dimension. One intervention begets another intervention. The snowballing rate of interventions will bring about unintended consequences such as swelling rate of government securities having negative yields and record stocks.

By the way, India and Poland’s actions accounts for 20 central banks cutting rates (Central Bank Rates). And this is aside from other easing measures, lowering reserve requirements, QE and etc…

So financial markets continues to rise even as real economic fundamentals deteriorate from which central banks respond to with amplified easing

And as proof of worsening of economic conditions, the Chinese government just announced a lowering of economic growth targets to 7%

From the Wall Street Journal:

China lowered its economic growth forecast to about 7% this year at the opening of the country’s biggest political event of the year, ushering in what leaders have dubbed a “new normal” of slower growth in the world’s second-largest economy.

Premier Li Keqiang ’s speech on the economy opened the National People’s Congress, China’s annual legislative session. Last year’s goal was “about 7.5%” though when actual growth came in at 7.4%—the slowest in more than two decades—officials disputed that it represented a miss…

In recent weeks, Beijing has unveiled increasingly dramatic moves to spur bank lending in a bid to rekindle economic momentum. But such moves could set back its efforts to shift away from excessive reliance on exports, a bloated property market and government spending.

What strategy Chinese leaders pick matters on a global level. A plan that emphasizes short-term growth could give a boost to a world economy suffering from Europe’s malaise and an unsteady recovery in the U.S., but it could also raise questions about China’s long-term role as a global economic growth engine.

At home, leaders face pressure for more action. Many businesses say they don’t want to borrow or expand given weak demand. Smaller companies that do say banks are holding back credit because of worries about bad loans.

The trajectory of declining economic growth rate aligns with the hissing credit and property bubble trends. And symptoms of balance sheet problems have been apparent; as noted above, businesses don't want to borrow or expand due to weak demand. You can lead the horse to the water but you can't make it drink. And for those who do, banks are withholding access to credit for the same reasons: balance sheet problems...worries about bad loans. 

As I recently noted, if the US experience should serve as a paragon, China could be consumed by a recession in mid 2016. Yet domestic and international policy actions could play a wild card, they could either buy time or even accelerate the process.

Going back to central bank actions. Harvard economist and former chairman of the Council of Economic Advisers under ex-US president Ronald Reagan, Martin Feldstein, explains at the Project Syndicate why central bank easing to combat deflation signifies a 'bogeyman'. For now, this unsustainable arrangement has camouflaged a massive build up of systemic risks.

Why, then, are so many central bankers so worried about low inflation rates?

One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions. And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts.

None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.

Again, two different responses to divergent perceptions.