Wednesday, 8 October 2008

Co-ordinated Interest Rates Cut

"The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented, emergency coordinated bid to ease the economic effects of the financial crisis.

The Fed cut its benchmark rate by a half point to 1.5 percent, the central bank in a statement. The ECB and central banks of the U.K., Canada, Sweden and Switzerland are also reducing rates, the Fed said in a statement.

``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

As I told last Friday, see article "ECB to Cut Rate...Pretty Soon. ":

In reality, I wouldn't be surprise to see both the US, UK and the ECB cutting rate all at the same time, maybe even as early as next order to shock the market. A bit like a patient that has had an heart attack...the credit market needs an electrical shock to bring it back to life.

Well it just highlight the gravity of the situation.

"The Governing Council of the ECB, by means of teleconferencing, has taken the following monetary policy decisions:

The minimum bid rate on the main refinancing operations of the Eurosystem will be reduced by 50 basis points to 3.75 %, with effect from the main refinancing operation to be settled on 15 October 2008.

The interest rate on the marginal lending facility will be reduced by 50 basis points to 4.75 %, with immediate effect.

The interest rate on the deposit facility will be reduced by 50 basis points to 2.75 %, with immediate effect.

In the euro area, upside inflationary risks have recently decreased further. It remains imperative to avoid broad-based second-round effects in price and wage-setting. Keeping inflation expectations firmly anchored in line with our objective and securing price stability in the medium term will support sustainable growth and employment and contribute to financial stability.

Information on the actions taken by the other central banks is available at the following websites:

Bank of Canada:
Bank of England:
Federal Reserve Board:
Sveriges Riksbank:
Swiss National Bank:
Bank of Japan:

I suppose this is only the beginning, the rate cut will continue well in 2009 to reach a low in 2010. Stock markets will rebound to only resume their downward trend until reaching bottom in 2010 . House price will fall until 2011 to stabilize after a loss of 10% to 30%. Let's not call that a bubble but just a normalization.


Andrew said...

can anybody here comment on the interbank lending situation in Finland? I am assuming that even if the previously cheaper short term funds are not available there is still access to more expensive long term funds? However while this might maintain survivability of a bank for a very long time until the short term rates are lower than long term then the amount of bank lending in future will be much much lower than has been the case in the last few/10? years. That then creates all manner of complications for what a house is worth. Because a house is worth what a person can afford to pay for it. Without cheap credit then house prices must be cheaper. This factor alone will create a depression if it cannot be solved.

The ECB can cut rates it charges banks to borrow but are these rates going to be passed onto customers? Indeed will customer rates increase anyway?

Do we have any evidence on the ground to say how this is working out so far?

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