Markets shrug off rate cut

By Ed Crooks and Norma Cohen in London

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Central banks around the world announced a co-ordinated cut in interest rates on Wednesday, but the latest dramatic intervention to solve the global financial crisis had a limited impact on investor sentiment.

The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Switzerland, Sweden and the United Arab Emirates all cut their main lending rate by 0.5 percentage points.

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The People’s Bank of China also announced a rate cut of 0.27 percentage points. The Bank of Japan, which already has a main lending rate of 0.5 per cent, did not cut its rate, but expressed “strong support” for the other banks’ moves.

The Fed, ECB and Bank of England issued statements with identical explanations for the move, saying inflationary pressures had started to moderate, and the recent intensification of the financial crisis had “augmented the downside risks to growth”.

The joint action by the world’s leading central banks temporarily halted the slide in global stock markets and boosted the euro and sterling against the dollar but these gains began to unwind by the end of the trading day in Europe.

After rising in morning trade US markets slumped as fears of a global recession mounted. The S&P 500 fell 1 per cent to 986.5, having earlier risen 1.5 per cent, and the Dow Jones Industrial Average slid 1.2 per cent to 9,330.95.

In Europe, stock markets fell towards day lows as the euphoria surrounding the co-ordinated action faded. The FTSE 100 slumped 5.5 per cent to 4,351.2, having earlier risen as high as 4,654. The Dax 30 in Frankfurt dropped 6.5 per cent to 4,982.9.

Asian markets, which closed before the co-ordinated bail-out, suffered heavy losses. The Nikkei 225 in Tokyo recorded its biggest one-day fall since 1987 and the Hang Seng in Hong Kong had its heaviest fall since 1973.

In the currency markets the yen rose to 3-year high against the euro and gained against the dollar as investors bet the Fed-led intervention would not stop the world economy falling into recession. The yen gained 1 per cent against the euro to Y136.52 and fell below Y100 against the dollar.

Oil futures prices resumed their slide on fears that rate cuts would not avert a global recession. Nymex November West Texas Intermediate fell $3.06 to $87 a barrel and ICE November Brent slid $2.96 to $81. Gold, which is seen as a safe haven in uncertain times, jumped $36.55 to $913.30.

The co-ordinated rate cut was the first time central banks had acted in unison to lower interest rates since the terrorist attacks on the US in September 2001.

“It [the rate cut] underlines how seriously they [central banks] are taking the situation and this more than anything should help instil more confidence in the system and lessen some of the tensions in the money markets,” said Charles Diebel at Nomura.

Earlier, London interbank offered rates (Libor) released before the emergency cut continued to rise, a sign of the ongoing mistrust between financial institutions. The overnight dollar rate surged 144 basis points to 5.38 per cent.

The Fed’s decision brought its benchmark rate to 1.5 per cent. The ECB’s main rate is now 3.75 per cent; Canada’s fell to 2.5 per cent; the UK’s rate dropped to 4.5 per cent; and Sweden’s rate declined to 4.25 per cent. China’s cut in interest rates was the second in three weeks, reducing the main rate to 6.93 per cent.

The Fed’s Open Market Committee, which voted unanimously for the move, said in its statement that “incoming economic data suggest that 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’’.

The Bank of England’s monetary policy committee, which brought forward its regular meeting scheduled for Wednesday by a few hours, said in a statement that it was balancing upside and downside risks to inflation, and “during the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside.”

The ECB said the recent decline in energy and commodity prices had helped ease inflationary pressures. Expectations about future price increases had diminished it said and were now ”anchored to price stability,”.

Despite the perceived easing of price rises in the eurzone, the ECB cautioned businesses and employers that it remained ”imperative” to avoid renewing inflationary pressures through ”broad-based second-round effects in price and wage setting.” Moderation in these areas would help the ECB fulfil its mandate of maintaining price stability in the medium term – at its preferred inflation rate of just under 2 per cent – and ”suport sustainable growth and employment and contribute to financial stability.”

The Fed also cut its rate on direct loans to banks, the so-called discount rate, by a half point to 1.75 per cent.

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