Central banks gear up to fight slump with low interest rates

The world of finance saw two major announcements on Wednesday. The European Central Bank (ECB) and its counterpart in Turkey cut lending rates amid worries over slowing global economic growth. 

Interest rates in key economies have come down in recent months as officials try to deal with the fallout of the trade war between the United States and China, Britain's departure from the European Union and a host of other geopolitical issues. 

A slump in manufacturing output in Europe’s powerhouse of Germany has increased urgency for officials to stimulate economic activity before it’s too late. 

The most recent data of the Organisation for Economic Cooperation and Development shows that economic growth in the 20 leading economies is at its weakest since 2013. 

But interest rates in developed countries, especially the EU member states have been very low, even negative in real terms, for some time and there are doubts if central banks alone can fight the slump. 

Negative rates mean financial institutions pay money to central banks to horde their cash. In other words there’s not enough appetite in industry and households to borrow money to spend it. 

That’s why ECB President Mario Draghi is being praised for not just lowering interest rates but also taking steps that would encourage European governments to invest in public projects such as hospitals and roads. 

The ECB will spend billions of dollars in coming months to buy government bonds in what is being seen as a new round of quantitative easing, which had helped sluggish European economies a decade ago after the 2008 financial meltdown. 

Draghi, who steps down as ECB head next month, was under pressure to do something to make EU governments loosen up their fiscal policies especially as Germany has stubbornly refused to widen its budget deficit. 

A stock of around $16 trillion debt, which is yielding negative returns, has left investors worrying - how can savers including pensioners expect to earn money when interest rates are negative? 

And here’s where developing economies such as Turkey come into play. 

Just a year back the Turkish currency, the lira, was battered as concerns grew over the country’s high foreign debt. This along with high inflation had pushed Turkey’s central bank to raise interest rate to 24 percent. 

The rate, which has since then come down to 16.5 percent, is high enough to lure investors searching for better returns when yields on debt have fallen elsewhere. 

 The prevailing monetary climate has given incentive for some politicians to pressure their central bankers into reducing rates. The US President Donald Trump has openly criticised the Federal Reserve for not being as aggressive as the ECB in reducing interest rates.