RBA slashes, BoJ dashes

The Reserve Bank of Australia apparently doesn't believe in timid moves. From Bloomberg:

Australia's central bank cut its benchmark interest rate by one percentage point, the most since a recession in 1992, triggering a rebound in Asian stocks on speculation other countries will follow to unlock credit markets...

Today's reduction, twice as much as economists forecast, took the overnight cash rate target to 6 percent, the lowest since November 2006...

Reserve Bank Governor Glenn Stevens said in Sydney today that "an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers."

The large cut initially raised hopes of coordinated rate cuts by global central banks.

"Rumors are now circulating that today's aggressive move by the Reserve Bank of Australia is the precursor for coordinated rate cuts by global central banks," said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Those hopes may have been dashed. From AFP/CNA:

The financial crisis will delay Japan's economic recovery but coordinated global interest rate cuts are not the answer, the country's top central banker said Tuesday...

[Bank of Japan governor Masaaki Shirakawa] said central banks should set monetary policy based on the health of their own economies.

Joint action may result in one country doing something that is not favourable for its own economy, he said, adding: "Each country will make its own decision considering its own conditions."

The BoJ itself left interest rates unchanged yesterday despite signs of a deteriorating economy.

Meeting amid fresh turmoil on world markets, the Bank of Japan left its super-low interest rates unchanged at 0.5 per cent - the lowest among major economies - where they have been since February 2007...

"We are now forecasting that an economic recovery will come a little bit later than we had originally anticipated," [Shirakawa] told a news conference...

The composite index of coincident economic indicators...fell 2.8 points from July to 100.7, the cabinet ministry said.

It was the largest drop since comparable records began in January 1980.

Meanwhile, Fed Chairman Ben Bernanke doesn't appear averse to a rate cut. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke signaled policy makers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy.

The world financial system is under "extraordinary stress" and history shows that severe instability "can take a heavy toll on the broader economy if left unchecked," Bernanke said in a speech in Washington. "The Federal Reserve will need to consider whether the current stance of policy remains appropriate."

But Bernanke also has other tricks up his sleeves. From Bloomberg:

The Federal Reserve will create a special fund to buy U.S. commercial paper, seeking to unblock the financing tool that drives everyday commerce for American businesses.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks, the central bank said in a statement released in Washington. Fed officials said they intend to set up the fund soon, while declining to specify a date.

Whenever this latest initiative gets going, it's unlikely to be too soon. There are concerns enough on the consumer side. Bloomberg reports:

Borrowing by U.S. consumers unexpectedly fell in August by the most on record as banks shut off access to loans, a report from the Federal Reserve showed.

Consumer credit fell by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion, the Fed said today in Washington. In July, credit rose by $5.2 billion, previously reported as a $4.6 billion gain. The Fed's report doesn't cover borrowing secured by real estate.

Meanwhile, indications are that the ECB is also prepared to lower rates. Bloomberg reports:

European Central Bank policy makers said inflation risks are waning as the credit crunch bites, giving the bank more room to cut interest rates.

"We face a global financial crisis of enormous proportions," ECB council member Miguel Angel Fernandez Ordonez told Spanish lawmakers in Madrid today. His Belgian colleague Guy Quaden said in Brussels that in the "new circumstances, a reduction of the official interest rate is no longer ruled out."

But at least there was some positive economic news coming out of the euro area in the form of a 3.6 percent increase in German factory orders in August.

In contrast, the newsflow from the UK has been gloomy. Industrial production fell a sharper-than-expected 0.6 percent in August and UK banks are looking wobbly, making it likely that the Bank of England will cut interest rates on Thursday.