Central banks slash rates, market still unhappy


Washington/Frankfurt : A joint effort by the world’s central banks to slash interest rates has been hailed as a new level of international cooperation, but failed to quell market jitters over the ongoing financial crisis.

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Wednesday’s move came as the International Monetary Fund (IMF) warned that the world was on the brink of a recession, as the financial turmoil would extend well into 2009.

In a near-unprecedented joint action, central banks from many of the world’s top economies slashed interest rates, mostly by 50 basis points, in a bid to improve credit access and ease the global downturn.

But US and European stocks still fell on the day as concerns about a recession, especially in the world’s advanced economies, outweighed the positive news of rate cuts.

US Treasury Secretary Henry Paulson warned that more banks will collapse as the financial system undergoes a prolonged period of restructuring.

The US Federal Reserve lowered its target for the federal funds rate by 50 basis points to 1.5 percent. The European Central Bank (ECB) reduced its benchmark refinancing rate by 50 basis points to 3.75 percent and the Bank of England cut its key interest rate by a similar margin to 4.5 percent.

The central banks of Canada, Sweden and Switzerland also joined in the coordinated cuts. The Bank of Japan did not cut rates but “expresses its strong support of these policy actions,” according to a joint announcement.

The People’s Bank of China followed only hours later, cutting its base interest rates for deposits and loans by 0.27 percentage points to 6.93 percent. The decision followed the country’s first interest-rate cut for six years on Sep 15.

IMF Managing Director Dominique Strauss-Kahn welcomed the central banks’ coordinated move, saying countries were “demonstrating their readiness to act to secure stability and growth and to promote an orderly functioning of the international financial system.”

World Bank President Robert Zoellick said the participation of an emerging economy like China showed it was “becoming a stakeholder in the process, and a constructive one.”

Finance ministers and central bank chiefs from around the world are headed to Washington Friday for annual meetings of the IMF, World Bank and the Group of Seven industrial nations to discuss the global response to the crisis.

Paulson also announced a “special meeting” of the Group of 20, which includes emerging economies. But the Treasury would not say if any new measures would be announced at the gatherings.

Share prices had shown signs of recovery after the announcements but most closed lower by the end of the day.

Interest-rate cuts had been expected by markets, but not as much, not as quickly and not in one fell swoop. Lower interest rates make it easier for industry and commerce to do business and generally prompt greater demand for goods and services.

The banks said they had conferred by tele-conference with one another on the extraordinary move. The last time banks cut rates like this was after the September 11, 2001 terrorist attacks on New York and Washington.

The banks acted after world stock markets had plunged for a third straight day and ended weeks of resistance by the ECB to a cut.

Just last Thursday, the ECB had insisted on delaying a few more weeks, saying the inflation risk was still there.

In London, British Prime Minister Gordon Brown told parliament that the decision to reduce the key sterling interest rate had been taken as part of worldwide action to combat economic turmoil.

The sterling interest rate had remained unchanged at 5 percent for the past five months, as the Bank of England, like the ECB, gave priority to the fight against inflation.

The six central banks said they were satisfied the risk of inflation had eased.

“Inflation expectations are diminishing and remain anchored to price stability,” the joint statement said.

In Washington, the Federal Reserve said economic indicators suggested “the pace of economic activity has slowed markedly in recent months.”

“Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”