Central Banks Around the World Cut Interest Rates

The biggest news item today is the unprecedented global rate cut announcement made early this morning by six central banks, including the Federal Reserve and the European Central Bank.

The coordinated interest-rate cut move, which includes actions taken by central banks in the U.K., Canada, Sweden and Switzerland, is aimed at ending global market meltdown with coordinated interest rate cuts designed to give the global economy a lift in the face of persisting strains in financial markets.

The Federal Reserve led the way today, deciding, ahead of its regularly scheduled meeting October 28-29, to lower its target for the federal funds rate 50 basis points to 1-1/2%. At the same time, the Bank of England cut its base rate by the same amount to 4.50%, followed by the European Central Bank which also announced a half-point cut to 3.75%. The Swiss, Canadian and Swedish banks joined in while China (cut by 27 basis points), Hong Kong and Australia also trimmed rates over the past day. The Bank of Japan expressed its strong support of these policy actions.

The coordinated rate cuts were accompanied by a joint statement in which the banks explained that inflationary pressures had begun to ease, especially given the intensification of the financial crisis.

Today’s action also marks a sharp turnaround for the European Central Bank [ECB], which had held its key rate target steady at 4.25% due to inflation concerns. Last week Jean-Claude Trichet, president of the ECB, said that the threat to inflation in the 15-nation euro zone was diminishing, suggesting that the bank was likely to cut interest rates. The ECB has been heavily criticized for not lowering interest rates in July. Trichet’s new willingness to do so opens the bank to criticism that it misjudged economic prospects of the 15-nation euro area.

From their part the Federal Reserve officials until recently had resisted further easing due to worries about inflation risks after watching the swings in commodity prices throughout the past year. However, in a joint statement made Wednesday, the Fed said that since inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices, at this level – inflation expectations are diminishing and remain anchored to price stability.

The Fed also pointed out that “the recent intensification of the financial crisis has increased significantly the downside risks to growth”, making the case that some easing of global monetary conditions is therefore warranted.

The Fed and other central banks also lowered their direct-lending rates. Financial institutions borrowing from the U.S. central bank’s discount window will now pay 1.75%, down half a percentage point.

The orchestrated rate reductions so far have had a mixed impact on the credit markets.

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