As a result of the 2008/2009 economic crisis, different countries are increasingly using monetary policies in an effort to stimulate their economic growth. One of the monetary policy tools being used is the cash rate which is the rate of interest that financial institutions charge to lend funds (Marthinsen, 2012, p. 202).
The Reserve Bank of Australia is one of the central banks which have adjusted the cash rate severally. In November 2011, RBA’s board lowered the official interest rate by 25 basis points to 4.25% (Reserve Bank of Australia, 2012, para.1). By adjusting the cash rate downwards, the central/reserve banks expect commercial banks to respond by adjusting their lending rate similarly and with the same margin.
This paper is aimed at evaluating situations of similar changes with specific reference to lending cuts undertaken by central/federal in other countries over the last year.
The paper has considered three countries which include Turkey, India and China. The report specifically focuses on cuts undertaken on the lending rate. Other roles performed by the central/reserve banks in an effort to promote economic stability are not considered.
China, India and Turkey are amongst the countries which have cut their lending rate over the last one year. For example, the Reserve Bank of India lowered the short term lending rate with a margin of 0.5% to 8% (The Economic Times, 2012, para. 1).
The decision by the RBI was motivated by the need to stimulate the country’s economic growth by lowering the rate of inflation. Findings of a study conducted by the RBI revealed that the country’s economic growth had slowed considerably in 2011 compared to the previous year.
In 2011, India experienced an increment in the rate of inflation which was fueled by increment in the price of commodities such as food and fuel (Ro, 2011, para.1).
However, from December 2011, India has experienced a significant decline in the rate of inflation as a result of the cut in the lending rate (Daily News, 2012, para. 3). This has arisen from the fact that cutting the lending rate is reviving investment and hence promoting employment (The Economic Times, 2012, para. 2).
Despite the measure taken by the RBI, some of the public and private-owned banks such as the State Bank of India are not willing to cut the lending rate sooner. These banks argue that they are experiencing narrow profit margins, threat of increased bad debts and high-cost of long term deposits (The Economic Times, 2012, para. 2).
As a result, they are not willing to follow RBI’s direction. Additionally, these banks argue that the tight cash conditions are making the deposits remain high thus preventing them from lowering their interest rate.
Similarly, from October 2011, Turkey reduced its overnight loans lending rate from 12.5% to 11.5%. Additionally, Turkey’s central bank also lowered its repo rate to 12%. The decision to lower the interest rate arose from an increment in the rate of inflation and currency deterioration.
Over the past year, the Turkish central bank has been reducing its lending rate. For example, from January 2012, the lending rate has been 7.5%. This has significantly enhanced the country’s economic growth despite the economic slowdown being experienced in Europe. Additionally, the cut in the lending rate is expected to enable country attain its 4% rate of economic growth during 2012 (Perker, 2012, para.1-3).
As a result of the previous economic meltdown both in the United States and the Euro zone, the People’s Bank of China resolved that it would reduce its interest rate with a margin of 25 basis points in order to revive the country’s economic growth. The Central Bank of China intended to achieve this by lowering the cash reserve ratio with a margin of 50 basis points.
The central bank intends to reduce the rate of interest from 6.56% to 6.06% during 2012. The downward adjustment in the rate of interest is expected to result into a decline in the rate of inflation during the 1st half of the country’s fiscal year (Financial Times, 2012, para. 1-4).
In summary, it is evident that a number of governments have incorporated monetary policies in their effort to stimulate their country’s economic growth. One of the monetary policy tools that they have incorporated entails open market operations which entail adjusting the lending rate. Turkey, China and India are some of the countries which have implemented this monetary policy.
As a result, they have successfully reduced their country’s rate of inflation. However, the effectiveness of this monetary policy in promoting economic efforts is limited by resistance by the commercial banks to cut the lending rate. Therefore, it is paramount of central banks to make it compulsory for commercial banks to cut their lending rate with the same margin that they reduce the interbank lending rate.
Reference List
Daily News, 2012, Indian central bank cuts key interest rates. Web.
Financial Times, 2012, People’s Bank of China may cut interest rates this year to boost growth. Web.
Marthinsen, J, 2011, Managing in a global economy: Demystifying international macroeconomics, Cengage, New York.
Perker, E, 2012, Turkish central bank unexpectedly cuts upper lending rates: Yields slide. Web.
Ro, S, 2011, Indian central bank raises interest rates and cuts GDP growth forecast. Web.
Reserve Bank of Australia, 2012, About financial stability. Web.
The Economic Times, 2012, RBI cuts lending rate to prop economy: Home, auto, and corporate loans to become cheaper. Web.
The Times of India, 2012, State bank of India may not cut lending rates soon: Chairman. Web.