Central Banks Coordinate Global Cut in Interest Rates
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By KEITH BRADSHER, DAVID JOLLY and EDMUND L. ANDREWS
Published: October 8, 2008
Central banks around the world cut short-term
interest rates by up to half a percent on Wednesday after investors
across Asia and Europe unleashed waves of sell orders onto already
depressed stock exchanges.
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A ticker outside the NBC studios in New York emphasized the falling financial markets.
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CNBC Video: European Bank Chief on Worldwide Rate Cut
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The Federal Reserve, the European Central Bank
and other central banks from Britain and Switzerland to Canada and
China announced rate reductions within seconds of one another. The
British government separately announced a plan to pump billions of
pounds into the country’s leading banks as part of a plan that would
result in considerably greater government influence over the financial
sector there.
The Fed said in a statement that, because of
weakening economic activity, it had cut the Federal funds target rate
by half a percentage point, to 1.5 percent. It also cut its discount
rate by the same amount. The vote was unanimous.
The European Central Bank cuts its benchmark rate to 3.75 percent, from 4.25 percent.
The action failed to calm gyrating markets, however, amid the growing
realization that a serious and prolonged recession may be difficult to
avoid. Markets in Europe closed lower while the Dow Jones industrial
average was struggling to maintain its gains in New York.
Federal Reserve officials said Wednesday’s action was the first time
ever that the Fed had coordinated a reduction in interest rates with
other central banks, though the United States has periodically joined
with other countries to intervene in currency markets to stabilize
foreign exchange rates.
The closest thing to a precedent came
in November 2001, when the Fed and the European Central Bank announced
a rate reduction on the same day. But those actions were nominally
independent, and they did not involve any additional foreign central
banks.
The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis
erupted in August 2007. The European Central Bank had been much more
reluctant to lower interest rates, because policy makers there tended
to see the mortgage meltdown primarily as an American problem with
secondary ripple effects in Europe.
But any lingering comfort
outside the United States evaporated in the last week, as money markets
froze up around the world and major corporations and banks across
Europe began suffocating from their inability to do even routine
financial transactions.
Making matters worse, none of the epic emergency measures taken in the United States — the passage of a $700 billion bailout plan
to buy up distressed securities; a doubling and redoubling of emergency
loan facilities at the Fed to $900 billion on Monday; and the Fed’s
unprecedented decision on Tuesday to start buying up short-term
commercial debt for businesses of all types — had prevented the stock
markets from plunging at vertigo-inducing amounts day after day.
Some analysts responded positively to the news.
“At
last, a coordinated show of force,” Ian Shepherdson, chief United
States economist at High Frequency Economics, wrote in a note. “The
move is to be applauded but there is more to come. The playbook to
avoid depressions says rates need to be as close to zero as possible.”
Other
economists were cautious about whether the various measures would be
successful, after previous plans like the United States’ economic
bailout have not halted steep declines in share prices.
“There’s
no silver bullet for these problems,” said Derek Halpenny, a currency
strategist at Bank of Tokyo-Mitsubishi UFJ in London. “But the actions
by the Fed on Tuesday, the U.K. government’s bailout plan today and the
bit-by-bit approach European governments are taking show the
authorities are getting more proactive.”
Tumult in financial markets is starting to spill into Asian political systems. Japan’s prime minister, Taro Aso,
promised a committee of Parliament on Wednesday that he would postpone
national elections, which had been expected early next month, to focus
on the unfolding financial crisis.
“Honestly, this for us is beyond our imagination,” Mr. Aso told the budget committee. “We have huge fears going ahead.”
Most Asian markets closed before the central banks acted, and share prices across the region suffered a drubbing.
In
Tokyo, the Nikkei 225 index plunged 9.4 percent, shedding nearly a
tenth of its value in its worst single-day loss in two decades. In Hong
Kong, gloomy investors gathered at day trading offices and morosely
checked their portfolios again and again as the Hang Seng index tumbled
8.2 percent. In Indonesia, the authorities simply shut down the stock
exchange by late morning after it had tumbled 10.4 percent.
