The Federal Reserve, European Central Bank (ECB) and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.
The Fed, ECB, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part.
Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point.
Today’s decision follows a global meltdown that sent US stock indices heading for their biggest annual decline since 1937; Japan’s benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed’s main rate doubled in two weeks to a record.
“They are throwing the kitchen sink in to try to find stability,’’ said Gregory Miller, chief economist at SunTrust Banks Inc in Atlanta. “They are clearly trying to get the transmission started again’’ after a freeze-up of money markets.
The Fed reduced 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 declined to 4.25 per cent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 per cent.
“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,’’ according to a joint statement by the central banks. “Some easing of global monetary conditions is therefore warranted.’’
After an initial rally, European shares and US stock indices headed lower. Some analysts said the central banks should have lowered rates by more, and predicted further reductions. Economists at Goldman Sachs Group Inc. and Morgan Stanley now project another half-point move by the Fed at its Oct. 28-29 meeting.
| INTERNATIONAL MARKETS | |||
| Oct 08,2008 | Net Chg* | % Chg* | |
| Jakarta Composite | 1451.67 | -168.05 | -10.38 |
| Nikkei 225 | 9203.32 | -952.58 | -9.38 |
| Hang Seng | 15431.73 | -1372.03 | -8.17 |
| SET | 492.34 | -36.37 | -6.88 |
| Straits Times | 2033.61 | -143.94 | -6.61 |
| Kospi | 1286.69 | -79.41 | -5.81 |
| Taiwan Taiex | 5206.40 | -318.26 | -5.76 |
| Sensex | 11328.36 | -366.88 | -3.14 |
| Shanghai Composite | 2092.22 | -65.61 | -3.04 |
| MICEX | 637.87 | -106.89 | -14.35 |
| DAX | 5255.89 | -70.74 | -1.33 |
| CAC 40 | 3696.98 | -35.24 | -0.94 |
| FTSE 100 | 4600.50 | -4.72 | -0.10 |
| Dow | 9593.42 | 146.31 | 1.55 |
| * over previous close # at 12 midnight (IST) | |||
“It should have been 1 percent to have a real impact,’’ said Robert Leonardi, a senior lecturer on European Union politics at the London School of Economics.
Global policy makers are reducing rates as economies weaken around the world. The International Monetary Fund said the global economy is heading for a recession in 2009 and increased its estimate of losses from the financial crisis to $1.4 trillion.
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.’’
Today’s action comes a day after Fed Chairman Ben S. Bernanke failed to assuage investors’ concerns about the deteriorating economy by signalling he was ready to lower borrowing costs.
