Globally, the drive to reinstate economic normalcy got more pronounced when, recently, China reduced its interest rate for the second time, and Bank of England injected small monetary dose in the system.

The Chinese Central Bank announced to cut its interest rates from 6.31 percent to 6 percent, a move to boost economic activity after China recorded its steepest fall in economic growth rate during the last three years.The Chinese economy grew at 8.1 percent annually, a direct impact of slow-down in exports to troubled European countries.

The stock market in China responded negatively to this latest package launched by Chinese Central Bank, with stock prices of major banks falling due to this unexpected action.Shares of the Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China are likewise moving into negative territory.

Recently, the Bank of England jumped into the rough waters and signaled that it would extend its quantitative easing program in an attempt to bring back stability and pull back the economy from the roughness of recession.

Chris Williamson, Chief Economist at Markit said, while referring to English economy “The Economy is showing signs of renewed stress, with GDP likely to fall for a third Successive quarter. Even the Purchasing Managers Index, PMI surveys, the strength of which in first quarter was seen as a key factor behind the bank of England holding off on further Quantitative Easing, have not fallen to an extent that would normally be consistent with further stimulus, based on historical relationships between PMI and policy.”

He believed that quantitative easing program may not produced any formidable impact, but said that at July meeting Monetary Policy Committee might inject money into the system boosting consumer confidence. The Bank of England injected £50 billion euros of electronic money into the system, a move that might help the off-balanced economy to re-balance itself.

And, to expand the drive of monetary stimulus, the European Central Bank joined the other banks by announcing a reduction in key lending rates from one percent to .75 percent. Globally, central banks are more cautious in safeguarding their economies from the venoms of recession, which are high sensitive to events that occur in different regions and circumstances.

Over the last few years, debt crisis in the Euro Zone and financial mayhem that erupted in the US has became the prime factor for weakening and destabilizing economies in other parts of the world. All economies are inter-connected and inter-related in forms and degrees.

Theory tells us that reduction of interest rates will lower the cost of borrowing, and thus will be able to draw the borrower an inch closer to borrowing  and effectively turn policy into real remedy. With fall in interest rates corporations find it easy to rely on borrowing because repayment will be less burdensome, since now corporations are required to pay lesser then earlier and finally leading to rise in production.

The hope is that monetary aid extended by central banks in various countries and diverse regions of the world might help the wheel of economic activity to gain velocity.

Image Courtesy of kool99 / Shutterstock.com

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.