Thursday, 30 October 2008

More rate cuts

The Federal Reserve cut interest rates by 50 basis points on Wednesday. Bloomberg reports:

The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, in an effort to avert the worst U.S. economic downturn in the postwar era.

"Downside risks to growth remain," the Federal Open Market Committee said today in a statement in Washington. "Recent policy actions, including today's rate reduction, coordinated interest-rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth."

Earlier in the day, China had also announced a rate cut. From Bloomberg:

China cut interest rates for the third time in two months to stimulate growth in the world's fourth-largest economy after the global financial crisis curbed exports and production.

The key one-year lending rate will drop to 6.66 percent from 6.93 percent, the People's Bank of China said on its Web site today. The deposit rate will fall to 3.60 percent from 3.87 percent. The changes are effective tomorrow.

And Norway's central bank also did its part. Again from Bloomberg:

Norway's central bank cut the benchmark interest rate by half a percentage point for the second time this month and forecast further reductions as it slashed its forecast for economic growth next year.

The bank reduced the overnight deposit rate to 4.75 percent, the lowest in a year, it said on its Web site today. The decision was expected by 10 of 14 economists surveyed by Bloomberg. Two expected a quarter-point cut and two forecast no change.

The Bank of Japan could be the next to cut. Bloomberg reports:

Speculation the Bank of Japan will cut interest rates for the first time in seven years jumped after the Nikkei newspaper reported that the central bank may halve its target rate this week.

The chance that the central bank will lower the benchmark lending rate to 0.25 percent from 0.5 percent on Oct. 31 rose to 62 percent from 8 percent yesterday, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

The Nikkei reported that central bank policy makers are leaning toward lowering borrowing costs this week, without citing any sources. The bank came under pressure to cut rates after the yen surged to a 13-year high, driving the stock market to its lowest since 1982. The policy board will make its decision taking market moves into account, the Nikkei said.

In reporting the expected BoJ move, Paul Davies at FT Alphaville says that "US stock markets saw a late surge on Tuesday when the speculation first emerged and Asian markets rallied strongly Wednesday followed by European and UK stocks."

Japan may be Asia's biggest economy and stock market but it is not always representative of what happens elsewhere on the continent. Here is the actual performance of Asian stock markets on Wednesday.

Index% change
Nikkei 2257.7
Hang Seng0.8
CSI 300-2.8
Sensex 300.4
Straits Times0.3

The US stock market ended down on Wednesday after diving near the end of trading. The S&P 500 closed 1.1 percent lower despite the Fed's rate cut and better-than-expected economic data. Bloomberg reports the latter.

Orders for U.S. durable goods, excluding cars and aircraft, fell for a second straight month in September as the credit freeze and a slump in sales caused businesses to cut back on investment.

The 1.1 percent drop in bookings of goods meant to last several years was less than forecast and followed a 4.1 percent decrease in August. A rebound in aircraft orders, a volatile category, and an increase in defense bookings unexpectedly pushed total orders up 0.8 percent.

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