Wednesday, October 8, 2008
Fed, ECB, Central Banks Cut Rates in Coordinated Move
...the recent intensification of financial crisis has augumented the downside risks to growth and diminished the upside risks to price stability...so some easing of monetary conditions is warranted... The Federal Reserve, European CentralBank and four other central banks lowered interest rates in anunprecedented coordinated effort to ease the economic effects ofthe worst financial crisis since the Great Depression. The Fed, ECB, Bank of England, Bank of Canada and Sweden'sRiksbank each cut their benchmark rates by half a percentagepoint. 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 lendingrate by 0.27 percentage point. Today's decision follows a global meltdown that sent U.S.stock indexes heading for their biggest annual decline since1937; Japan's benchmark today had the worst drop in two decades.Policy makers are also aiming to unfreeze credit markets afterthe premium on the three-month London interbank offered rate overthe Fed's main rate doubled in two weeks to a record. "Central banks of the world have finally woken up to the gravity of the current situation,'' Charles Diebel, head ofEuropean rates strategy at Nomura International Plc in London,wrote in a note. ``It is potentially not the last we will seeof central bank activity particularly in Europe as the macrosituation is still weakening dramatically.'' Rate Levels The Fed reduced its benchmark rate to 1.5 percent. The ECB'smain rate is now 3.75 percent; Canada's fell to 2.5 percent; theU.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to4.25 percent. China cut interest rates for the second time inthree weeks, reducing the main rate to 6.93 percent. ``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.'' Fed officials, who have kept their benchmark rate at 2percent since April, may have wanted time for their record loansto the financial industry and new programs, including purchasesof commercial paper, to bear fruit before lowering rates.Investors instead perceive the economic outlook deterioratingmore rapidly, necessitating rate reductions. The declines in U.S. shares the past two days followed pre-market opening announcements of fresh actions by the Fed to thaw credit markets. Stocks tumbled in Europe and Asia todayand S&P 500 futures dropped 3.4 percent to 972 points.