Federal Reserve initiates worldwide frenzy of interest rate cuts
Federal Reserve lead a coordinated global interest rate cutting frenzy, Wednesday, slashing the cost of borrowing by 0.5% to 1.5% in order to stimulate spending as the credit crunch bites.
The American move was followed by five other major central banks, European Central Bank, United Kingdom, Sweden, Canada and Switzerland. Australia chose to cut rates 1% and China reduced its cost of lending by 0.27%.
In the words of the Federal Reserve's statement the cut was intended to encourage spending to counteract the "intensification of financial market turmoil [which] is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."
The European Central Bank's lending rate now rests at 3.75%. The Bank of England's rate is now 4.5%. Australia's central bank cut its benchmark lending rate by twice as much, down 1% to 6%.
In another major economy, the Bank of Japan did not lower its rate: it remains at 0.5%, where it has been since February 2007.
What about inflation?
High interest rates are usually a brake on inflation, but with world oil prices back below $90 barrel - an eight month low, down from a recent all time high of $140 - and with food and commodity prices stalled or in free-fall partly due to recession, economic leaders have seized the opportunity to put their foot on the economic accellerator.
The question is: will the economic machine respond?
Capital Economics analyst Julian Jessop, speaking to Agence France Press would not be 100% convinced.
"Today's coordinated half-point rate cuts from all the major central banks will provide at least a temporary boost to confidence but we fear that there is still a lot more work to do."
Given the course ahead is still full of hurdles of accounting rules and potholes of toxic loans - partly dealt with in the United States' Emergency Economic Stablisation Act (2008), but not yet fully addressed in Europe - this might be an understatement.
Tags: Interest Rate Cut , Federal Reserve , Credit Crisis , Rate
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