What does the chart show?

This chart shows the target interest rates of several major central banks. Central bank interest rates are a monetary tool that, among other things, are used to help control inflation within an economy by stimulating or cooling economic activity. When central banks raise interest rates they discourage borrowing and spending among businesses and consumers. This may damage short-term economic growth but can be necessary when inflation is too high. Alternatively, the lowering of interest rates helps to stimulate growth by encouraging borrowing and spending. The graph shows how, across most major economies, central banks have been forced to raise interest rates from the historic lows seen during the pandemic, to tackle high levels of inflation. Over the past year and a half, rates have risen from virtually 0% to as high as 5.25%. For many monetary authorities, these are the highest that rates have been since before the 2008 financial crisis. One outlier is China where rates, which were at much higher levels during the pandemic, have instead been cut. The rate on the People’s Bank of China (PBOC) medium-term lending facility (MLF) currently sits at 2.65%.

Why is this important?

While activity in economies such as the US and the Eurozone has continued to surprise to the upside, China’s momentum since reopening has already begun to falter. Year-on-year growth in key areas, such as retail sales and industrial output, is still positive but has disappointed especially given last year’s low base during lockdowns. Chinese exports declined in May and are unlikely to recover as global activity struggles under the load of higher rates. The focus now turns to the Chinese authorities who are under pressure to hit the 5% growth target set at the beginning of the year. The cutting of the main policy rate shows some intent by the PBOC, but a cut of just 10 basis points is unlikely to make enough of a difference. It is possible that China is wary of the kind of measures seen recently in western economies, given the inflationary consequences of those policies. China itself has suffered from a stimulus driven rise and subsequent fall of its property market which has yet to fully recover. However, with inflation nearing deflationary levels, there is certainly some room for the PBOC to cut rates. Some fiscal stimulus is also expected to target problem areas, such as the property sector and youth unemployment. Some tax breaks have already been implemented, but measures so far have been underwhelming. It is also possible that more than just monetary and fiscal stimulus is required to help change China’s fortunes. For now, however, the focus remains on whether Chinese authorities are as concerned about the economy’s faltering momentum as some onlookers are.