Red alert! 12 central banks cut rates this year

cheap money

At least 12 central banks have cut interest rates since the start of the year, signaling just how fragile the global economy is right now.

The move to make money even cheaper is sweeping across emerging markets and the developed world. Central banks representing roughly 60% of the global economy are cutting rates, or using other tools to pump more cash into the system.

Australia was the latest to trim rates to record lows this week, following cuts from Canada, Switzerland, Russia, India and others since the start of the year. China -- the world's second biggest economy -- cut rates at the end of 2014, and is expected to do so again in 2015.

Seven of the world's 10 biggest economies are in easy money mode. The U.S. and U.K. are in neutral. Only Brazil is currently raising rates.

Central bankers are reacting to expectations for weaker growth. The threat of deflation, or dangerously low inflation, is also forcing them to act.

The European Central Bank will launch a massive bond buying program worth at least $1.3 trillion next month to counter falling prices. Japan's central bank said last month it would continue to print money too.

"Inflation rates are falling globally, which are panicking central banks to do more than what even the most pessimistic analyst may have predicted," explained Bank of America Merrill Lynch strategists in a research note.

Related: This is the global economy's 'sink or swim' moment

The rate cuts and other monetary policy measures are intended to boost economic activity and inflation by encouraging bank lending. They also often have the effect of devaluing currencies, which helps lift exports.

But here's the problem: If everyone attempts to tackle deflation by depressing the value of their currencies, nobody wins. And this could hurt the U.S., which is the only major economy expected to start raising interest rates this year.

After impressive 5% growth in the third quarter, the U.S. economy cooled at the end of 2014. Fourth quarter growth of 2.6% was lower than expected.

The slowdown could be attributed in part to the rallying dollar, which has soared by 18% versus a group of other major currencies since mid-2014.

Global investors seeking higher returns have bid up the dollar, but this threatens to hurt American exports and corporations that operate overseas.

Microsoft (MSFT), Google (GOOG) and Visa (V) have already warned that the dollar's strength could hurt their sales abroad.

Strong dollar won't hurt these stocks
Strong dollar won't hurt these stocks

U.S. Treasury Secretary Jack Lew said this week that U.S. economy could not pull the rest of the world out of the mire.

"While the recovery in the U.S. economy has helped to drive global growth, the rest of the world cannot depend on the United States to be the sole engine of growth," he said. "We must lead by example, [but] we cannot do it alone."

Related: Making money as the Fed raises rates won't be easy

A prolonged "easing war" among central banks can create another headache down the line by artificially boosting the value of stocks and real estate.

"The longer this goes on, the more asset prices become over-valued and vulnerable to correction," the Institute of International Finance said Wednesday.

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