Johannesburg – In the past week global markets pinned their hopes on central banks, even amid central bankers’ continuous warnings that they do not have the power to calm the world’s economic storms.
On Thursday stock markets gained ground after the Chinese central bank lowered its lending rate for the first time since the 2008 financial crisis.
Optimism over this unexpected decision was however quickly dashed on Thursday afternoon when Dr Ben Bernanke, who chairs the US Federal Reserve, gave no sign that he was planning a further monetary injection into the US economy.
To tell the truth, Bernanke warned that the European debt crisis could impair America’s economic recovery.
Markets and the euro slumped with the disappointment. On Friday the JSE’s All-share index closed in the red at 33 665 points. But it was 1.68% up over the week as a whole.
On Thursday the rand firmed to as much as R8.22 to the dollar, but by late Friday afternoon it was trading at R8.43.
Market sentiment was also hurt by credit rating agency Fitch lowering its rating for Spain three notches to just short of worthless. Fitch also said that the Spanish economy would probably still be in recession in 2013.
On Friday officials in Germany and the European Union told Reuters that over the weekend the Spanish government would request assistance to rescue its banking system.
But on Friday afternoon the Spanish government was still denying that it would approach the EU for assistance, thus doing nothing to alleviate the uncertainty about the country.
Theuns de Wet, head of fixed income, currency and commodities research at Rand Merchant Bank (RMB), said monetary policy should steer the ship while politicians quibble about the measures they can introduce.
He said an increased burden on central banks will cause high levels of volatility to persist in financial markets.
Last week RMB adjusted its rand forecasts based on new concerns over Europe. It now expects the rand to trade in a band between R8 and as much as R9 to the dollar this quarter.
On Thursday SA Reserve Bank governor Gill Marcus repeated her warning that central banks could not take responsibility for governments to stimulate global economic growth.
At national congress of the National Union of Metalworkers, Marcus said more realistic expectations should be entertained for monetary policy.
“If households and businesses do not invest or spend – either because of a lack of confidence or lack of access to finance, or because they are paying off debt – low interest rates alone will not be able to stimulate growth.”
Marcus also said that European governments had failed to make good use of the time that the European Central Bank (ECB) had won for them through injections of liquidity into the region’s banking system.
“The crisis is worsening, with the recession (in parts of Europe) probably escalating in the coming weeks.”
Marcus’ warning was confirmed on Friday by the news that in April German exports had declined for the first time this year. German growth in the first quarter was the only reason for the eurozone avoiding a recession.
On Wednesday ECB chair Dr Mario Draghi left the eurozone’s interest rate unchanged, despite poor growth numbers.
In no uncertain terms he said that the ECB could not compensate for other policymakers’ failure to act.