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Central banks cut interest rates

Discussion in 'International Forum' started by Njowepo, Oct 8, 2008.

  1. Njowepo

    Njowepo JF-Expert Member

    Oct 8, 2008
    Joined: Feb 26, 2008
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    Six central banks - including the Bank of England - have cut their interest rates by half a percentage point.
    The UK rate move - which had not been expected until Thursday - puts the interest rate at 4.5% from 5%.
    The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%.
    The unprecedented step is aimed at steadying a faltering global economy and slumping stock markets.
    The central banks of Canada and Sweden and Switzerland all took similar action in the co-ordinated move.
    China also cut its rate, but by 0.27 percentage points.

    European financial markets reacted well, pulling back some of the losses seen earlier on Wednesday.
    The last time the Bank of England cut rates in a special meeting was on 18 September 2001 - when rates came down from 5% to 4.75%.
    'Bold and decisive'
    The announcement came hours after the UK government unveiled plans for a £50bn rescue plan for UK banks.
    In the UK, some mortgage lenders immediately passed on the rate cut to borrowers - trimming their variable rates.
    Responding to the interest rate cut, UK manufacturers' group the EEF welcomed the " bold and decisive move" it hoped would "arrest the current crisis and collapse in confidence".
    "Coupled with the plan to shore up the financial system today's co-ordinated moves should help arrest the potential slide into depression," said the EEF's chief economist Steve Radley.
    Chief international economist at Capital Economics, Julian Jessop, said that the rate cut would "provide at least a temporary boost to confidence".
    But he added: "We fear that there is still a lot more work to do.
    "The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become."
    He also warned that rate cuts were not a complete solution, pointing out the Fed had already cut rates from 5.25% in September last year to 2% before the latest move - action which happened "without rescuing either the financial system or the real economy."
    And analyst Peter Warburton of Economic Perspectives said the rate cut was "fully justified by the depth of the economic crisis that the UK is now facing".
    "It has taken far too long for the government and the Bank of England to recognise the scale of threat posed by the seizing up of the credit system," he said.
    'Strong support'
    The Federal Reserve said that it had acted "in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures".
    And the ECB said it had felt able to act because "inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices".
    Although it did not cut its own rate - which is just 0.5% - the Bank of Japan expressed its "strong support" of the policy.