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Central banks cut rates to stem crisis

Six central banks, including the US Federal Reserve, the European Central Bank (ECB) and the Bank of England, jolted markets yesterday by cutting interest rates together in an attempt to shore up confidence in the world’s crisis-stricken financial system.

The move — the first coordinated interest rate reduction since one made in the wake of the Sept. 11, 2001, terrorist attacks in the US — helped stock markets around the world rally off lows earlier in the session.

All cut by a half-percentage point — a bold stroke intended to send a strong message and restore confidence, as well as keep the credit crisis from further damaging the wider economy as companies struggle to borrow for everyday and long-term needs. Fearful banks are refusing to lend to one another and markets in commercial paper, or short-term unsecured company debt, have been frozen.

The Fed reduced its key rate from 2 percent to 1.5 percent, while the Bank of England cut its base lending rate by half a point to 4.5 percent, and the ECB, which last week decided to keep borrowing costs on hold, cut to 3.75 percent. Other central banks also taking part include the banks of Canada, Sweden and Switzerland. China also cut but did not join in the group statement that accompanied the decision.

The cuts yesterday came as markets in Asia and Europe sank amid waning confidence, Britain stepped in to support banks and Russia closed its main stock market for two days.

“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,” the six central banks, along with the Bank of Japan, said in a joint statement.

“Some easing of global monetary conditions is therefore warranted,” the statement said.

Brown, who earlier in the day announced assistance for major British banks, said that the action came because “global problems are best dealt with by global action.”

“By taking coordinated action as a whole and leading the world in doing so, I believe we can get our banking system on a sound footing, and that is the key to the future,” Brown told lawmakers at the House of Commons.

There had been mounting talk in the markets in recent days, especially after the surprise 1 percentage point rate cut from the Reserve Bank of Australia on Tuesday, that the world’s central banks would have to cut interest rates together as stock markets continued to dive.

“We have seen a step up in the financial turmoil this week and the frozen money markets coupled with equity markets required an aggressive response,” said Divyang Shah, chief strategist at the Commonwealth Bank of Australia.

“Given questions over how effective these moves will be in arresting the negative spiral in confidence further rate cuts cannot be ruled out,” he added.

Markets breathed a sigh of relief that policy-makers have finally decided to work together on something to address the crisis of confidence gripping financial markets.

As of press time, the FTSE-100 of leading UK shares was down only 42.45 points, or 0.9 percent, at 4,562.77, having earlier been 5 percent down.

The CAC-40 in Paris, which had been down as much as 9 percent earlier, recouped most of the earlier losses, and was down just 2 percent at 3,656.87. The DAX also bounced back and was down 2.5 percent at 5,195.78, having been as much as 6 percent lower earlier.

Also See: Tight credit is menacing everyone — even state governments、Merkel calls for united EU response to crisis
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