Thursday, November 6, 2008

Bank of England, ECB Cut Inteest Rates

Britain slashed borrowing costs by a surprising 1.5% points on Thursday and the European Central Bank (ECB) also cut rates as part of concerted efforts to revive world commerce.

The ECB met market expectations by reducing its interest rate by 0.5%, a move political leaders hope will limit any move into recession and curb job losses. The ECB move took its benchmark rate to 3.25 percent.

The Bank of England, faced with a slumping housing market, a decline in manufacturing and increased unemployment, astonished analysts by announcing a hefty 1.5 percentage point cut, the biggest since the Bank gained independence to set rates 11 years ago and a mark of the gravity of concern over the economy.

Matthew Sharratt, UK economist at Bank of America, echoed widespread sentiment in calling the British cut "astonishing." Jonathan Loynes of Capital Economics called it "spectacular."

"There is still more to do," Loynes said. "At 3%, UK interest rates are still well above U.S. ones when economic conditions suggest they should be as low if not lower ...Our view remains that UK rates will fall to 1% or below."

Last month, the Bank of England joined forces with the U.S. Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates. Politicians in the 15-country euro zone hope a rate cut from the ECB, possibly half a point, will help stave off recession and limit unemployment.

The 15-nation euro zone's economy, which had grown steadily since the bloc's creation in 1999, contracted by 0.2% in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures on November 14.

Banks infected by a collapse of confidence within the financial system are still wary of extending loans and are reluctant to pass cuts on to borrowers. But the sheer scale of Thursday's cut will put pressure on British banks to conform and back smaller businesses.

The Swiss national bank also cut its rates by 50 basis points.

Markets looked to U.S. President-elect Barack Obama to name key members of an economic team that must tackle a crisis that originated in the U.S. housing market 15 months ago before enveloping the banking system of the global economy.

"After the world rally on the day of the presidential election, investors have now shifted their focus to how fast, and how well the new administration will address the current economic issues," said Yoo Soo-min, analyst at Hyundai Securities.

U.S. crude oil lost 2% to $63.96 a barrel, against a record high above $147 set in July. The fall will reduce inflationary pressure on national economies and ease rate cuts.

Falling world oil prices and ebbing economic activity have effectively banished fears of inflation that dominated policy thinking only a year ago.

The first black U.S. president has to wait until January 20 to move into the White House. In the meantime, though, he must decide on a successor for Treasury Secretary Henry Paulson, one of the architects of a $700 billion state rescue package inconceivable before the crisis broke.

Timothy Geithner, president of the Federal Reserve Bank of New York, former Treasury Secretary Lawrence Summers and former Fed Chairman Paul Volcker are among those mooted for the Treasury post. Obama may announce his pick on Thursday.

A Swedish central bank official said the shape of a Nordic aid package to crisis-hit Iceland had been decided. Norway said earlier this week it would provide Iceland with a 500 million euro ($643 million) loan to help the country rebuild an economy in tatters following the collapse of its biggest banks.

Source: Reuters

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