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Wednesday, 8 October 2008
Central Banks Launch Rate Cut
Central banks around the world announced a co-ordinated cut in interest rates on Wednesday, in response to mounting fears about the impact of the financial crisis on the world economy. PDF
By Ed Crooks and Norma Cohen in London 8 October 2008
Central banks around the world announced a co-ordinated cut in interest rates on Wednesday, in response to mounting fears about the impact of the financial crisis on the world economy.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Switzerland and Sweden and the United Arab Emirates all cut their main lending rates by 0.5 percentage points.
The People’s Bank of China also announced a rate cut of 0.27 percentage points. The Bank of Japan, which already has a main lending rate of 0.5 per cent, did not cut its rate, but expressed “strong support” for the other banks’ moves.
The Fed, ECB and Bank of England issued statements with identical explanations for the move, saying inflationary pressures had started to moderate, and the recent intensification of the financial crisis had “augmented the downside risks to growth”
The euro and sterling, which have fallen in recent weeks against the dollar, gained following the announcement, while the yen, which is seen as a reserve currency, lost ground.
Equities in London rebounded on hopes the co-ordinated action would help banks and consumer stocks.
Futures trading predicted sharp gains for major Wall Street Indices, with the S&P 500 called 20 points higher at 1,026.0 and the Dow Jones Industrial Average expected to rise 140 points to 6,678.0. US markets have fallen for five straight sessions falling to multi-year lows.
Oil prices rebounded from early losses on hopes that a global recession might be averted after the central banks took action and government bond prices fell.
The action, while highly unusual and a strong signal of the authorities’ determination to act, is not unprecedented.
There was a roughly co-ordinated series of rate cuts around the world following the terrorist attacks in New York in September 2001.
“It [the rate cut] underlines how seriously they [central banks] are taking the situation and this more than anything should help instill more confidence in the system and lessen some of the tensions in the money markets,” said Charles Diebel at Nomura.
The Fed’s decision brought its benchmark rate to 1.5 per cent. The ECB’s main rate is now 3.75 per cent; Canada’s fell to 2.5 per cent; the UK’s rate dropped to 4.5 per cent; and Sweden’s rate declined to 4.25 per cent. China’s cut in interest rates was the second in three weeks, reducing the main rate to 6.93 per cent.
The Fed’s Open Market Committee, which voted unanimously for the move, said in its statement that “incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending’’.
The Bank of England’s monetary policy committee, which brought forward its regular meeting scheduled for Wednesday by a few hours, said in a statement that it was balancing upside and downside risks to inflation, and “during the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside.”
The Fed also cut its rate on direct loans to banks, the so-called discount rate, by a half point to 1.75 per cent.
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Central Banks Launch Rate Cut
By Ed Crooks and Norma Cohen in London
8 October 2008
Central banks around the world announced a co-ordinated cut in interest rates on Wednesday, in response to mounting fears about the impact of the financial crisis on the world economy.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Switzerland and Sweden and the United Arab Emirates all cut their main lending rates by 0.5 percentage points.
The People’s Bank of China also announced a rate cut of 0.27 percentage points. The Bank of Japan, which already has a main lending rate of 0.5 per cent, did not cut its rate, but expressed “strong support” for the other banks’ moves.
The Fed, ECB and Bank of England issued statements with identical explanations for the move, saying inflationary pressures had started to moderate, and the recent intensification of the financial crisis had “augmented the downside risks to growth”
The euro and sterling, which have fallen in recent weeks against the dollar, gained following the announcement, while the yen, which is seen as a reserve currency, lost ground.
Equities in London rebounded on hopes the co-ordinated action would help banks and consumer stocks.
Futures trading predicted sharp gains for major Wall Street Indices, with the S&P 500 called 20 points higher at 1,026.0 and the Dow Jones Industrial Average expected to rise 140 points to 6,678.0. US markets have fallen for five straight sessions falling to multi-year lows.
Oil prices rebounded from early losses on hopes that a global recession might be averted after the central banks took action and government bond prices fell.
The action, while highly unusual and a strong signal of the authorities’ determination to act, is not unprecedented.
There was a roughly co-ordinated series of rate cuts around the world following the terrorist attacks in New York in September 2001.
“It [the rate cut] underlines how seriously they [central banks] are taking the situation and this more than anything should help instill more confidence in the system and lessen some of the tensions in the money markets,” said Charles Diebel at Nomura.
The Fed’s decision brought its benchmark rate to 1.5 per cent. The ECB’s main rate is now 3.75 per cent; Canada’s fell to 2.5 per cent; the UK’s rate dropped to 4.5 per cent; and Sweden’s rate declined to 4.25 per cent. China’s cut in interest rates was the second in three weeks, reducing the main rate to 6.93 per cent.
The Fed’s Open Market Committee, which voted unanimously for the move, said in its statement that “incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending’’.
The Bank of England’s monetary policy committee, which brought forward its regular meeting scheduled for Wednesday by a few hours, said in a statement that it was balancing upside and downside risks to inflation, and “during the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside.”
The Fed also cut its rate on direct loans to banks, the so-called discount rate, by a half point to 1.75 per cent.
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