Saturday, May 19, 2007

Should the Fed cut rates by 3 basis points?

Bloomberg highlights a much overlooked aspect of monetary policy, at least in the United States:

The People's Bank of China today raised its one-year benchmark lending rate by 0.18 percentage point and its one-year deposit rate by 0.27 percentage point.

Why 18 or 27 basis points instead of the increments of 25 used by most other central banks? The answer has to do with the Chinese calendar and superstition, as well as the ancient Asian counting device, the abacus.

"In China, interest rates are always set to be multiples of nine,'' said Fan Wenzhong, deputy director at the Research Department of the China Banking Regulatory Commission in Beijing.

Because the financial year in China has 360 days, it's easier to compute monthly and daily rates if yearly rates are evenly divisible by nine, as are the current lending and deposit rates. The divisible-by-nine rule was enshrined in accounting standards issued jointly by the central bank and the Ministry of Finance in 1993.

The rule also simplifies interest computation on an abacus, the calculating tool that came into use more than 2,000 years ago during the Han Dynasty and is still used today.

"Rates divisible by nine avoid rounding of interest and allow easier calculation by abacus,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. In addition, the number nine in Chinese shares a pronunciation with the word "longevity'' and has long been considered a lucky number. Chinese wedding feasts have nine dishes; Beijing's Forbidden City has 9,999 rooms.

Maybe the Fed should cut the target federal funds rate from 5.25 to 5.22 (522 = 9 x 58). Given the rapid growth in China in recent years, they must be doing something right.