Fed, ECB, BOE, China cut interest rates to fight global financial crisis

Posted Oct 8th 2008 8:28AM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Federal Reserve, Recession, Financial Crisis

In an unprecedented, emergency, coordinated move, the Fed and other major central banks cut interest rates Wednesday, in an attempt to prevent the global financial crisis from spreading further and damaging economies.

The Fed, European Central Bank, Bank of England, Bank of Canada, Sveriges Riksbank, and the Swiss National Bank each lowered their benchmark rates by 50 basis points. The Bank of Japan was not involved in this round of rate cuts, but said it fully supported the action.

Separately, China's central bank also lowered its one-year lending rate by 0.27 percentage points.

"`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,'' the banks said in joint statement. "Some easing of global monetary conditions is therefore warranted."

The action brought the Fed's benchmark rate to 1.5%; the ECB's main rate is now 3.75%; Canada's declined to 2.5%; the U.K.'s rate fell to 4.5%; Sweden's rate declined to 4.25%. China's rate fell to 6.93%.

The Fed also lowered the discount rate by 50 basis points to 1.75%.

Economic David H. Wang said he favored the move. "We have to maintain liquidity, get banks to start lending again, and recapitalize banks. This action will help encourage banks to lend by creating a greater financial incentive for them to lend," Wang said. "This is only one additional step to check the financial crisis, and many more fiscal and monetary policy action will be needed to achieve that goal."

Wang said G-7 leaders must now think in terms of a global, coordinated action to guarantee debt owed to banks and/or mortgage refinancing to further lower fear in the system and check home home foreclosures -- what he called "two major pressure points feeding this crisis."

Monetary / Economic Analysis: The move is warranted, but as economist Wang noted, many more actions, fiscal and monetary, must take place to maintain credit market liquidity -- the backbone of the economic system. Actions also must be taken to prevent -- or counteract -- the effects of banks hoarding cash. If necessary, direct lending channels must be established to maintain the flow of money to corporations and other key institutions, in order to keep commercial activity possible.

Tags: Bank of England, banking sector, banks, bond market, China, contagion, credit markets, ECB, European Central Bank, featured, Fed, interest rates, monetary policy, Riksbank, U.S. Federal Reserve

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Reader Comments (Page 1 of 1)

10-08-2008 @ 9:28AM

Len Robertson said...

More and more, this tired old blue globe becomes Earth, the new Rome, and less Spaceship Earth. And, like Imperial Rome back in the day, New Rome needs many provinces to support it: Mars, Mercury, Jupiter, Saturn and assorted moons such as Luna, Europa and Titan.

10-08-2008 @ 10:14AM

Economist said...

The key here is not to panic. The feds have pumped money into the banking system and has taken steps to offer low interest loans to businesses. We have the same market conditions we had a few weeks ago and the last thing we want to do is scare the American public and have them stop buying. Banks are working feverously to prevent foreclosures, and the last step in the equation is to make lower interest loans available to people like these http://www.buymyhousebeforethebanktakesit.com , once you do, it will ease up their disposable income and allow them to spend again.