There It Is: A Coordinated Rate Cut by Seven Monetary Authorities

October 8, 2008

Rate cuts of 50 basis points were announced at 11:00 GMT jointly by the Fed, ECB, Bank of England (which will not meet tomorrow as scheduled), Swedish Riksbank, and Bank of Canada.  The new benchmark rates at these respective central banks are 1.5%, 3.75%, 4.5%, 4.25%, and 2.5%.  In addition, the Swiss National Bank sliced its key 3-month Libor rate range by 25 basis points to 2-3% with a central point target of 2.5%, and the People’s Bank of China sliced its 1-year deposit rate by 27 bps to 3.87%, its 1-year lending rate by 27 bps as well to 6.93%, and its reserve requirement by 50 basis points to 17% for big banks and by 16% for all other banks.

The last time central banks acted around the same time was after the 9/11 attacks, but that incident involved less coordination than this time.  Announcements then did not come precisely at the same time and was more narrowly based.  China’s inclusion in today’s action is especially notable.  China is too big a piece of the international monetary system to be left out of any solution.  Their rate cut represents a bigger symbolic than real economic move.  The Norges Bank of Norway explicitly declined to take part in today’s moves, but other central banks like the central bank in Denmark, which generally moves in lockstep with the ECB, will not doubt adjusted quickly.  Most disappointing is the non-participation of the Bank of Japan, which only released a statement of support for the actions of others.

Many statements have been released, citing intensifying financial market distress, weakening economic growth, falling commodity price-fueled inflation, and lower expected inflation.  Links to those statements are as follows.

Federal Reserve: Central Bank Joint Statement and Own Actions to be Taken

ECB Statement

Bank of England Statement

Swedish Riksbank

Bank of Canada Statement

Swiss National Bank Statement

People’s Bank of China Web-Site

Statement from Bank of Japan, Which Did Not Cut Rates

 

In reaction to these moves, the dollar is higher against the yen but lower against European currencies and commodity-sensitive currencies.  Stocks and oil are higher, while gold is lower. But if this crisis has taught markets anything, it is that no single step is a panacea.  Actions that might have worked earlier in the saga have been less effective when taken after more water had flowed under the bridge.  Confidence has been fleeting.  These actions are intended to rebuild some confidence and contain market fear.  They were taken to counteract the real-side effects of a dysfunctional financial system and  not done earlier because lower rates per se will not directly address the root structural causes of the banking problem, one of which is the still-declining housing markets in the United States and many other countries.  The one novel idea to emerge from the Obama-McCain debate last night was the latter’s endorsement of Professor Feldstein’s recommendation for the government to buy and renegotiate bad home mortgages.  These or other remedies will take time to implement and are unlikely to be done before a new administration has come to power.  Political uncertainty will continue to be a powerful force working against efforts to stabilize confidence and markets.  Meanwhile, the real economies of the G7 will likely get a lot worse before bottoming.

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One Response to “There It Is: A Coordinated Rate Cut by Seven Monetary Authorities”

  1. Ron says:

    Larry, You called it yesterday! You said this is what the central banks would have to do and they did it! Glad they “listened” and hope it helps!

    Kudos to you for accurate prognostication!
    Ron

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