World's Banks In Joint Action To Halt Carnage

The Age

Thursday October 9, 2008

By Ben Perry, London and Marc Moncrief

THE world's leading central banks last night simultaneously cut their interest rates, in an unprecedented combined bid to restore confidence to the shattered global financial system.

The US Federal Reserve, the European Central Bank, the Bank of England and central banks in China, Sweden, Switzerland and Canada all moved in unison, most of them cutting rates by half a percentage point.

The co-ordinated move, aimed at averting the threat of a global recession, was announced about 10pm Melbourne time. It took financial markets by surprise a day after Australia's Reserve Bank cut its official rate by a full percentage point.

The central banks said in a joint statement that they had co-operated in "unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets" during the crisis.

The announcement came after another day of turmoil on the markets, with the Australian dollar crashing through the 65 US cent barrier to a new five-year low, and sharemarkets across Europe and Asia suffering further dramatic falls.

In one of the dollar's most volatile days since it was floated in 1983, it plunged more than six US cents to touch a new low of 64.51 cents about 8pm last night - more than 30% below where it was in mid July, when it was worth more than 98 US cents.

Later last night, it had bounced back above 67 US cents, following the joint interest rate move by the world central banks.

The joint action also provided some initial respite for European sharemarkets, which had been as much as 8% down in early trading last night.

Less than an hour after the announcement, London's FTSE 100 index had recovered from a deficit of more than 4% to be 0.36% higher.

Earlier, investors stripped another 5% from the value of Australian shares, leaving them 35% off last year's all-time peak, despite the generally positive reaction to the Reserve Bank's move on rates.

In Japan, stocks fell by 9.4% - the third-biggest decline on record - despite legislators approving a massive economic stimulus package. And in Jakarta, stocks tumbled more than 10%, forcing a halt to trading.

The turmoil spread to Europe later, with shares in London, Paris and Frankfurt all down heavily again before the central banks' announcement.

The Australian dollar fell not just against the US dollar but most of the major world currencies, including the Japanese yen, the British pound and the Euro.

Westpac chief economist Bill Evans said it showed investors were increasingly concerned about the risk of a global recession halting demand for Australia's commodities.

"If you were talking about a global recession, then markets would tend to think that commodity-related currencies would do the worst," he said. "But, if you were to see some stability in the US market then this would turn around with gusto."

After its shock interest rate cut on Tuesday, the Reserve Bank yesterday announced it would relax standards on the collateral it demands from banks to borrow money. The move will supply banks with extra money expected to be demanded by consumers in response to lower interest rates.

Britain's central bank took dramatic action of its own yesterday, announcing a #500 billion ($A1276 billion) rescue package to prevent a collapse of its banking system.

The move came as the International Monetary Fund warned that the world economy was entering a major downturn in the face of the most dangerous shock in financial markets since the 1930s. In its latest World Economic Outlook, released in Washington overnight, the IMF forecast the US and parts of Europe would probably go into recession - if they have not already done so - and that the downturn would continue until late 2009, with the outlook being subject to "considerable downside risks".

It was a little more upbeat on prospects for Australia than other big developed economies, forecasting GDP growth of 2.5% in 2008, falling to 2.2% in 2009.

However, the forecasts might already be dated, particularly as they do not take into account the latest dramatic developments in financial markets.

Figures released yesterday in Australia show a nation increasingly concerned about its prospects. Home loan approvals fell by 2.2% in August - more than twice the forecast fall. And, according to Westpac, consumer sentiment dropped by 11% in the month before the rate cut was announced.

Westpac's Mr Evans said the only comparable collapses in consumer sentiment on record were after the shares crash of 1987 and the bursting of the dot.com bubble.

"It didn't even fall this much at 9/11," Mr Evans said, referring to the terrorist attacks of September 11, 2001.

The consumer sentiment index, which was completed before the interest rate cut, found 20% fewer people thought it was a good time to buy a major household item. Mr Evans said such sentiment could mean a slow Christmas for retailers.

However, investors who punt on interest rate movements expect the RBA to cut another 1% from interest rates by the end of the year - which could provide a boost to spending.

Following the lead of the big four banks - ANZ, Commonwealth Bank, National Australia Bank and Westpac - smaller banks yesterday began announcing their decisions on the rate cut. Bendigo Bank, BankWest and Members Equity all cut 0.8 of a percentage point from their variable home loan rates.

Opposition Leader Malcolm Turnbull claimed the banks would have passed on less if not for the pressure he had been placing them under in the weeks before the cut.

Commonwealth yesterday promised to lower rates further when financial markets "normalise" and to cut rates without a cue from the Reserve Bank.

UNITED THEY STAND: THE US, EUROPE, BRITAIN AND CHINA SLASH INTEREST RATES AS PART OF A GLOBAL RESCUE BID.

AUSTRALIA - Shares plummet 5%, wiping $56 billion from market's value. Dollar drives below 65 US cents, a new five-year low, before staging a recovery.

UK/EUROPE

Britain announces ?500 billion bail-out for banks. Shares crash, rebound on news of the rates cut, then swing wildly.

ASIA

Japanese parliament approves $US18 billion emergency budget, Stocks plunge 9.38% in Tokyo, 10.4% in Jakarta, 3.04% in Shanghai.

UNITED STATES

Wall street opens lower, IMF predicts major banks may ned fresh capital to recover from credit crisis.

© 2008 The Age

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