By KEITH BRADSHER, DAVID JOLLY and EDMUND L. ANDREWS - October 9, 2008
Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell orders onto already depressed stock exchanges.
The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of each other. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there.
The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous.
The European Central Bank cuts its benchmark rate to 3.75 percent from 4.25 percent.
The moves had some initial effect on stock markets. European markets pared their heavy losses after the announcement, only to fall again. And index futures rose sharply, then also fell, indicating a lower opening.
Federal Reserve officials said this was the first time ever that the Fed coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.
The closest thing to a precedent for Wednesday’s action came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks.
The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis erupted in August 2007. The European Central Bank had been much more reluctant to lower interest rates, because policy makers there tended to see the mortgage meltdown primarily as an American problem with secondary ripple effects in Europe.
But any lingering comfort outside the United States evaporated in the last week, as money markets froze up around the world and major corporations and banks across Europe began suffocating from their ability to do even routine financial transactions.
Making matters worse, none of the epic emergency measures taken in the United States — the passage of a $700 billion bailout plan to buy up distressed securities; a doubling and re-doubling of emergency loan facilities at the Fed to $900 billion on Monday; and the Fed’s unprecedented decision on Tuesday to start buying up short-term commercial debt for businesses of all types — had prevented the stock markets from plunging at vertigo-inducing amounts day after day.
“At last, a coordinated show of force,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note. “The move is to be applauded but there is more to come. The playbook to avoid depressions says rates need to be as close to zero as possible.”
Other economists were cautious about whether the various measures would be successful, after previous plans like America’s economic bailout have not halted steep declines in share prices.
“There’s no silver bullet for these problems,” said Derek Halpenny, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London. “But the actions by the Fed on Tuesday, the U.K. government’s bailout plan today and the bit-by-bit approach European governments are taking show the authorities are getting more proactive.”
Tumult in financial markets is starting to spill into Asian political systems. Japan’s prime minister, Taro Aso, promised a committee of parliament on Wednesday that he would postpone national elections, which had been expected early next month, in order to focus on the unfolding financial crisis.
“Honestly, this for us is beyond our imagination,” Mr. Aso told the budget committee. “We have huge fears going ahead.”
Most Asian markets closed before the central banks acted, and share prices across the region suffered a drubbing.
In Tokyo, the Nikkei 225 Index plunged 9.4 percent, shedding nearly a tenth of its value in its worst single-day loss in two decades. In Hong Kong, gloomy investors gathered at day trading offices and morosely checked their portfolios again and again as the Hang Seng Index tumbled 8.2 percent. In Indonesia, the authorities simply shut down the stock exchange by late morning after it had tumbled 10.4 percent.
As demoralized traders and investors began heading home or to bars in Asia, the same frenzied selling was beginning again as markets opened in Europe. Share prices were down nearly 3.9 percent in London, nearly 4.6 percent in Frankfurt and 3.9 percent in Paris.
“I don’t think anyone has seen anything like this in a long time,” said Eugene Galbraith, president commissioner of the Bank Central Asia in Jakarta.
Stock analysts in Asia described the market as a full-scale rout, as foreign investors in particular appeared to dump indiscriminately everything they could.
“It’s a just a panic out there,” said Hajime Kitano, chief equity strategist in Tokyo for J.P. Morgan Securities. “People want to avoid anything that even looks like risk.”
Underlying much of the selling was a growing pessimism that the troubles of the world’s financial markets have spilled into the United States and European economies, and then into developing countries that depend on exports to the industrialized world.
While many specialists have suggested that Asia could withstand financial difficulties in the West because most banking systems in Asia are fairly sound, the region remains heavily dependent on exports to the United States and Europe.
As problems have spread from financial markets into the real economies of the West, their demand for Asian goods will weaken and growth in Asian economies will slow, said Michael Buchanan, Goldman Sachs’chief economist for Asia except Japan.
“For a long time, I think Asia was hoping exports to Europe would make up for a shortfall in the U.S.,” but now European economies are slowing as well, Mr. Buchanan said.
Robert Cardarelli, a senior International Monetary Fund economist, said at a news conference in Hong Kong on Wednesday that the fund’s recent research showed that during financial crises in which banks are particularly affected, “we are in for a much more severe and protracted downturn.”
Plunges in Asian stock markets caused many investors to buy yen, as Japan’s well-capitalized banking system appeared to be a refuge from turmoil in financial markets even as the Japanese stock market showed extremely heavy losses. The yen punched through the level of 100 to the dollar, reaching 98.935 to the dollar — up from 101 yen on Tuesday and 105 yen at the end of last week.
But the yen quickly retreated again, to 100.415, after central banks reduced interest rates. Lower interest rates often weakena currency, by making it less attractive to park money in a currency offering a low return. But the rate cuts on Wednesday appeared to improve investors’ assessment of the economies in countries lowering interest rates and made these economies seem like better destinations for investments.
By contrast, the dollar was little changed against the euro throughout the trading day in Asia and through the morning in European trading, with the euro worth $1.363 by late morning in Europe. After the rate cut by central banks, the euro began to recover from its losses in recent weeks, and was worth $1.3705 by early afternoon in Europe.
The sharp drop of share prices in Hong Kong came despite an announcement late Wednesday morning by the Hong Kong Monetary Authority that it had effectively lowered its benchmark interest rate for loans to banks by a full percentage point, to 2.5 percent.
In Washington, the chairman of the Federal Reserve, Ben S. Bernanke, had telegraphed a rate cut on Tuesday, In a speech, he said that the financial turmoil had forced the Fed to downgrade its already-gloomy economic forecast and investors had all but assumed that it would lower the benchmark Federal funds rate no later than its next scheduled policy meeting on Oct. 28 and 29.
But until a few weeks ago, Fed officials had tried to separate its rescue efforts in the financial markets from problems of the underlying economy. After a rushed series of rate reductions last fall and early this year, bringing the overnight Fed funds rate down to 2 percent in April, the central bank had concentrated its efforts on injecting hundreds of billions of dollars into the inancial system in order to keep banks lending to one another and to their customers. But policymakers held back from further reducing interest rates, which reduce the overall cost of money, because they were worried about rising inflationary pressures.
Consumer prices have climbed sharply over the past year, largely because of huge increases in energy and commodity prices. As recently as the Fed’s policy meeting three weeks ago, the central bank’s official position was that its concerns about slowing economic growth were roughly equal to its concerns about rising prices. In reality, many policymakers were more worried about the onset of a recession — which many private economists say has already arrived. But there were still disagreements among members of the Federal Open Market Committee, which sets interest rates.
Contributing reporting were Martin Fackler, Bettina Wasserman, Michael M. Grynbaum, Hilda Wang and Peter Gelling.
http://www.nytimes.com/2008/10/09/business/09fed.html?exprod=myyahoo
Copyright 2008 The New York Times Company
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