Desperate central banks cut rates


Richard Moore

It’s like on one of those hospital TV shows. They’re desperately trying to revive the patient, and on the screen nothing but a flat line and a beep.

Central banks cut interest rates

Six central banks, including the Bank of England, have cut interest rates by half a percentage point in an effort to steady the faltering global economy.

No decision on UK rates had been expected until Thursday – and the move puts the interest rate at 4.5% from 5%.

The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%.

The unprecedented step failed to cheer world stock markets.

The central banks of Canada and Sweden and Switzerland all took similar action in the co-ordinated move.

China also cut its rate, but by 0.27 percentage points.

European and US initially reacted well to the news but later turned lower as investors were unconvinced that the rate cuts would really solve the financial crisis.

In New York, the main Dow Jones stock index ended down 189 points or 2% at 9,258.1 after weaving in and out of positive territory.

The last time the Bank of England cut rates in a special meeting was on 18 September 2001 – when rates came down from 5% to 4.75%.

In the UK, some mortgage lenders also immediately passed on the rate cut to borrowers – trimming their variable rates.

In other major developments:

  • The UK government unveiled a package of measures aimed at rescuing the banking system which could add up to £400bn ($692bn).

The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become 
Julian Jessop 
Capital Economics 
  • US Treasury Secretary Henry Paulson said that more financial firms were expected to fail in the US despite a $700bn government bail-out programme.
  • The Federal Reserve has agreed to provide insurer American International Group with a $37.8bn loan on top of the $85bn loan given to the troubled firm last month.
  • Italy also unveiled details of a banking rescue plan that could involve the government taking stakes in failing banks.
  • All UK savers with accounts in the closed Icelandic internet bank Icesave were told they would get all their money back.
  • The Treasury arranged for more than £3bn of UK savers’ money held with Icelandic banks Kaupthing Edge and Heritable Bank to be transferred to ING Direct UK.
  • Iceland’s prime minister said he hoped to find a “mutually satisfactory solution” to the loss of UK Icesave deposits after Prime Minister Gordon Brown threatened to sue Iceland to recover the money.

‘Arrest the slide’

Responding to the interest rate cut, UK manufacturers’ group the EEF welcomed the “bold and decisive move” it hoped would “arrest the current crisis and collapse in confidence”.

“Coupled with the plan to shore up the financial system today’s co-ordinated moves should help arrest the potential slide into depression,” said the EEF’s chief economist Steve Radley.

Chief international economist at Capital Economics, Julian Jessop, said that the rate cut would “provide at least a temporary boost to confidence”.

But he added: “We fear that there is still a lot more work to do.

“The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become.”

He also warned that rate cuts were not a complete solution, pointing out the Fed had already cut rates from 5.25% in September last year to 2% before the latest move – action which happened “without rescuing either the financial system or the real economy.”

‘Taken too long’

The Bank of England’s Monetary Policy Committee said that getting inflation down to the government’s 2% target remained its goal.

The latest data puts inflation at 4.7%, and it is likely to rise above 5% in coming months before falling, the MPC said.

But analyst Peter Warburton of Economic Perspectives said the rate cut and government intervention should have come earlier.

“It has taken far too long for the government and the Bank of England to recognise the scale of threat posed by the seizing up of the credit system,” he said.

‘Strong support’

The Federal Reserve said that it had acted “in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures”.

And the ECB said it had felt able to act because “inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices”.

Although it did not cut its own rate – which is just 0.5% – the Bank of Japan expressed its “strong support” of the policy.

Story from BBC NEWS:
Published: 2008/10/08 22:28:27 GMT