Central banks cut lending rates to stem fear epidemic

HT Correspondent, Hindustan Times
New Delhi, October 09, 2008

Global economic powers on Wednesday stitched together a desperate plan with major central banks announcing simultaneous lending rate cuts to keep credit flowing amidst piling debris of the international financial collapse.

The US Federal Reserve announced a 0.5 per cent cut in its benchmark lending rate, from 2 per cent to 1.5 per cent. The announcement came early on Tuesday, catching traders by surprise.

The European Central Bank, and central banks of Britain, Canada, Sweden, Switzerland and China followed suit, announcing similar rate cuts that ranged from a cut of 0.27 per cent in the case of China to 1 per cent in Australia and Hong Kong.

The move, however, failed to cheer stock markets with major bourses tumbling — Indonesia was down by 10.4 per cent; Japan 9.4 per cent; Hong Kong 8.2 per cent; UK 5.2 per cent. The US market, at the time of writing, was down almost 2 per cent.

The unprecedented, coordinated move came barely a week after the US government announced a $700 billion (Rs 32.2 lakh crore) bailout package for its beleaguered financial companies. It also came amid a gloomy outlook for the global economy.

In its latest World Economic Outlook released on Wednesday, the International Monetary Fund (IMF) said the world economy is decelerating — buffeted by an extraordinary financial shock and by still-high energy and commodity prices. Many advanced economies are close to or moving into recession, it warned.

The report, which was released two days prior to the IMF-World Bank annual meetings in Washington, said growth in emerging economies is weakening after years, though they will continue to drive global growth.

IMF chief economist Olivier Blanchard called for implementing joint financial and macroeconomic policies “to stem the negative momentum on multiple fronts”. On the financial side, “this implies the design of comprehensive programs to deal with systemic problems,” while on the macroeconomic side, “this implies the use of monetary and fiscal policies to support growth…”

The contagion has spread across continents after the stunning collapse of many investment banks, in the wake of a mortgage lending crisis, forcing many government and regulatory authorities to take a slew of measures.

The British government has said it would pump £50 billion (Rs 4 lakh crore) package, while the German government had said earlier this week that it would temporarily insure all holdings in the country’s bank accounts.

Spain has said it would create a 30 billion euro fund to purchase assets and maintain credit flow, while Iceland has taken over two of its largest banks — Landsbanki and Glintir


Source - HIndustan TImes