More rate cuts abroad, and signs of optimism in China

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With the Bank of England‘s cut in its benchmark short-term interest rate to 1% today, all but one of the Western world’s major central banks now have embraced the 1%-or-less solution to battle the global economic slump.

The Bank of England slashed its key rate from 1.5%.

The Bank of Canada’s benchmark rate also is at 1%. The Bank of Japan is at 0.1%, while the U.S. Federal Reserve decided in December to allow its rate to fall as low as zero, setting a range of zero to 0.25%.

The European Central Bank still is holding out at 2%. ECB policymakers met today but decided against another cut, although President Jean-Claude Trichet told reporters, ‘I don’t exclude that we could reduce interest rates at our next decision,’ in March.

All of the central banks are trying to spur lending and credit creation to stop the economy’s slide. The obvious risk is that they’re running out of bullets as rates near zero.

The Bank of China, which also has sharply reduced interest rates since fall, may be seeing more results than its Western counterparts, without joining the 1% Club.

The Bank of China’s benchmark lending rate now is 5.31%, down from 7.47% in August. Bloomberg News on Wednesday quoted from a China Securities Journal story that said Chinese banks may have offered a record volume of new loans in January.

‘Rates were cut to stimulate lending, so now that lending growth is beyond everybody’s expectations the need for further cuts has weakened,’ Ma Jun, chief China economist with Deutsche Bank in Hong Kong, told Bloomberg.

Interestingly, China’s stock markets have been among the world’s best performers this year -- perhaps a sign that investors believe the Chinese economy is bottoming.

The Shanghai composite stock index is up 15.2% year to date, while most of the world’s markets are in the red again.

I was going to add that China’s stock markets have a reputation for being casinos that are at the mercy of short-term speculators. But we probably could say that about just about all stock markets now.

-- Tom Petruno