Central Banks Panic – ECB, BOE and RBA may follow the Fed to cut rates in the next week

This week the Central Banks were shocked by sudden slump in economic activity. After the Fed cut benchmark rate to 1% on Wednesday, Bank Central of Japan followed to cut its benchmark rate by 20 basis points to 0.3% on Friday. This Saturday, Bank Central of India also followed to cut rate for the second time in two weeks after kept it for 7 years.

Ben Bernanke and colleagues were also signaling they may cut the benchmark rate further to below 1% as downside risks remain to growth high. The economy contracted by the most since 2001 in the third quarter and Fed Bank of San Francisco President Janet Yellen said on Oct. 30 that rates may head to zero (ZIRP – Zero Interest Rate Policy) if economic pain persists.

Meanwhile, not all banks are easing. Iceland this week unexpectedly raised its main rate by 6% to 18% as it battles a currency crisis and possible hyperinflation with the help of the International Monetary Fund.

Central banks are going beyond interest-rate policy to confront the unprecedented crisis with unconventional measures. The Fed on Oct. 29 agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore to unfreeze money markets, the first time it has extended such measures to emerging nations. Meantime, the ECB gave Denmark access to 12 billion euros.

In the next week, ECB and BOE will likely follow the Fed to cut its benchmark rate on November 6 by 50 basis points to 3.25% and 4% respectively, according to economists expectation. Australia’s Central Bank (RBA – Reserve Bank of Australia) may also cut rates on November 4 after lowering them by 100 basis points to 6% last month.

The idea to cut rates has solidified pretty sharply that the world economy is going to fall pretty hard here and some good old- fashioned monetary easing is in order, according to Joseph Lupton, an economist at JPMorgan.


Related Posts :

1. India unexpectedly cut rates for the 2nd time in 2 weeks to boost growth
2. Bank of Japan cut interest rate by 20 basis points
3. Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent

Sources :

Bloomberg: ECB May Follow as Fed, BOJ, India `Shocked' Into Cuts (Update1), November 1 2008 06:42 EDT

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