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Australia and China, economic powerhouses in the Asia-Pacific region, are using interest rates in contrasting approaches to post-Covid economic recovery.
While Australia — like many nations around the world — is witnessing a rise in interest rates, China is opting for rate cuts in an effort to bolster its faltering economy.
China’s central bank, the People’s Bank of China (PBOC), recently made its first rate cuts in 10 months, signalling concerns about the slowdown in the world’s second-largest economy.
The rate cuts come as Wall Street banks, including Goldman Sachs, revise down their forecasts for China’s economic growth.
Goldman Sachs downgraded its growth forecast for the year from 6 per cent to 5.4 per cent, stating that the post-Covid recovery in China appeared to have “fizzled out” in the second quarter.
China and Australia have taken polar opposite approaches to rates-driven recovery. Picture: Brent Lewin/Bloomberg
The PBOC reduced its one-year loan prime rate (LPR) by 10 basis points to 3.55 per cent and lowered the five-year rate to 4.2 per cent by the same margin. These cuts follow earlier reductions in interest rates.
The LPR serves as a benchmark for household and corporate lending, influencing the interest rates charged by commercial banks to their clients.
The cuts are aimed at stimulating business confidence and housing demand, but some analysts believe they may not be sufficient.
Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank, expressed scepticism about the effectiveness of the rate cuts in boosting market confidence and housing demand.
“The 10 bps rate cut[s] are unlikely to stimulate business confidence and housing demand,” he told CNN.
“We reckon that a bold stimulus package covering fiscal policy and supporting measures in property markets are needed to revive market confidence on China’s recovery,” he added.
Stock markets in Hong Kong and mainland China have been impacted.
The rate cuts immediately impacted stock markets in Hong Kong and mainland China, with the Hang Seng (HSI) Index declining by 1.7 per cent and the Shanghai Composite dropping by 0.5 per cent. Goldman Sachs analysts noted that while the rate cuts were in line with expectations, some forecasters had anticipated a deeper cut.
They expect further policy easing measures to be announced in the coming weeks, although the magnitude of the stimulus may be smaller than in previous cycles.
China is facing multiple challenges in its economic recovery. Property investment has declined, factory activity has slumped to its weakest level since the end of zero-Covid policy, and exports have fallen as global growth slows down.
Data on retail sales, industrial output, and investments have also fallen short of market expectations.
However, the most concerning issue for policymakers is the persistently high unemployment rate, particularly among young people.
On the other side of the spectrum, Australia is experiencing rising interest rates amid concerns of rampant inflation.
Several investment banks, including TD Securities, Goldman Sachs, and Capital Economics, have warned that interest rates in Australia have not yet peaked.
The cash rate, currently at 4.1 per cent, is expected to reach 4.85 per cent after September, indicating the likelihood of three more rate hikes.
Australia’s labour market has remained surprisingly strong despite the looming recession.
The jobless rate decreased from 3.7 per cent in April to 3.6 per cent in May, and the number of unemployed people shrank by 76,000 in just 31 days.
However, economists are cautious about the impact of the Fair Work Commission’s increase in the minimum wage, as it may lead to higher inflation expectations and the need for further rate hikes.
Prashant Newnaha, senior strategist at TD Securities, emphasised the necessity of the rate hikes, citing concerns about inflation and the need to anchor inflation expectations.
“The red hot Australian labour market poses the threat that inflation expectations become unanchored given weak productivity and upside risks to the RBA’s wages forecasts,” he told The Australian.
Although the forecast paths of rate hikes may seem aggressive, they are deemed necessary for the Reserve Bank of Australia (RBA) to achieve its inflation target by the end of 2024.
Australia’s central bank recently raised interest rates by 25 basis points, bringing the cash rate to 4.1 per cent.
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This marked the 12th rate hike since May of the previous year and the highest cash rate in the past 11 years. It’s not all bleak for Aussies.
The ASX surged to a nine-week high this week with market optimism traced back to China, which seems to have “hit the stimulus button”, said Tribeca Alpha Plus Fund Lead Portfolio Manager Jun Bei Liu.
“In the last couple weeks we have seen consecutive announcements about lowering more consumer targeted stimulus, as well as the rate cuts,” she told Sky News Australia.
“All that is a sign that perhaps bigger packages are to come – that’s really been pulling the resources sector for quite a few weeks.”
China’s rates approach caused the ASX to surge. Picture: David Swift
As Australia and China navigate their divergent paths to economic recovery, the outcomes will have significant implications for the global economic landscape.
While China aims to revive its faltering economy through rate cuts, Australia grapples with inflation concerns and the need to contain rising prices through rate hikes.
The effectiveness of these different strategies will determine the resilience and strength of these two influential economies in the post-Covid era.
Nation doubles rates in one go
This all come as major nations around the world increased rates in the past week to battle rising inflation.
The Bank of England on Thursday lifted its key interest rate by a half-point to five per cent, the Swiss central bank hiked its interest rate by a quarter point and Norway’s central bank raised its key policy rate by 50 basis points to a 15-year high of 3.75 per cent.
However, the most shocking rise came from Turkey.
The nation’s central bank on Thursday reversed years of unconventional economics promoted by President Recep Tayyip Erdogan and nearly doubled its key interest rate to fight inflation and steady the troubled lira.
The bank hiked the rate to 15 per cent from 8.5 percent in its first meeting since Erdogan filled his government with investor-friendly faces after winning tight May polls.
It added that this was only the start of a process aimed at bringing Turkey’s annual inflation rate of nearly 40 percent to single figures “as soon as possible”.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” the central bank said.
— with AFP
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