With Australia’s central bank the latest to cut interest rates, is the global recovery at risk?

The Reserve Bank of Australia has cut interest rates to two per cent (Source: Getty)

Steven Feng, a research fellow at Griffith University Asia Institute, says Yes

The global economy risks slipping into a deflationary trap. The US recovery is built on shaky ground, the Eurozone faces an imminent threat to its integrity, hopes for supply-side reform in Japan have faded, and China is in de facto deflation.

Emerging economies are waiting for the drop of the other boot in terms of the Fed’s interest rate hike. And more scary is that policymakers tend to rely on monetary manipulation to get out of the quagmire. QE is the buzzword. We already live on a gigantic credit overhang from the financial crisis, and it seems we are heading to a debt bubble 2.0.

Nick Beecroft, chairman at Saxo Bank, says No

The Australians had to cut interest rates, given the global currency war. Yes, we should forget the days of 10 per cent Chinese growth. But this does not imply a crash – it simply reflects a rebalancing towards personal consumption and away from investment and trade.

With ample scope to cut interest rates, slash bank reserve requirements, loosen property regulations and expand fiscal policy, China’s authorities have many levers to pull. In the US, the labour market is very strong and, with subdued inflation, the Fed probably won’t raise rates this year, meaning the consumer – 70 per cent of its economy – can flourish.

Related articles