The latest cut in bank interest rates for the first time in more than three years was widely welcomed, especially by the thousands of investors in the moribund stock market, as a timely boost for the economy, which seems to have lost its earlier momentum.

Many economists are predicting that further rate cuts are on the way, arguing that the decline in inflation to 3 percent in May left room for more ambitious economic stimulation measures. The stock market didn't seem to agree. Since the cut was announced on June 7, the Shanghai Composite Index, the most widely followed indicator, has continued to move listlessly. The much anticipated rebound in share prices and turnover failed to materialize.

Stock markets usually reflect investors' expectations of economic performance six months ahead. The rather lukewarm response of the Shanghai stock market to the latest rate cut showed that many institutional investors remain skeptical of the impact that the lower cost of money may have on the real economy, especially the export sector.

Because overseas demand is expected to remain low while the economic recovery of the United States is sputtering and the European Union is battered by the worsening financial crisis that is threatening to spread from Greece to the larger economies, such as Spain, cheap money and easy credit will only have the effect of feeding the real estate bubble which the government has made great efforts to deflate. Rather than investing in new plants and machinery, many private-sector factories in the industrial heartland of the Yangtze River Delta region, have been shedding assets to survive the export crunch.

Meanwhile, consumer spending growth has continued to slow because many families are conserving cash for leaner times ahead. Lower bank charges aren't going to help much in boosting consumer spending because consumer credit accounts for only a small portion of total retail sales, except, perhaps, in the major cities.

Against such an economic backdrop, more aggressive rate reductions could drive up inflation by fuelling speculative activities especially in the real estate sector. Already, there were reports of a resurgence in the property craze in some cities. In Shenzhen, more than 1,000 eager homebuyers stood in line for hours waiting for their turn to purchase apartments that were recently put up for sale.

The risk of triggering another bout of domestic inflation can be too much to bear at a time when the global economy has remained in a state of flux. Although the European Central Bank and Germany, the EU's largest economy, are holding tight to their conviction that austerity and internal depreciation in the form of lower wages are the only way to save the weaker EU economies from financial meltdown, the tide of public opinion in France and other EU economies is shifting to pro-growth.

Not many changes are expected in the United States before the presidential election in November. If US President Barack Obama wins his re-election, he will be seen to have the mandate to pursue a more expansionary economic policy to spur economic growth. The Republicans may be talking tough on budget balancing. But if Mitt Romney wins the White House, he too, will come under great pressure to spend public funds on creating jobs while the private sector is showing no interest in expansion.

The political climate on both sides of the Atlantic is leaning more and more toward stimulating growth while accepting a higher level of inflation. The latest trade figures show that there was already a recovery of exports to the US although shipments to Europe have remained depressed. When the politicians get their act together, we can expect to see moderate, but sustainable, global economic growth, resulting in an increase in world trade.

That can happen sooner than we expect. And that's the time when an aggressive rate reduction can help the real economy by making capital available at lower cost to manufacturers who see the need to expand production capacity to meet increased demand.