Business

Friday October 31, 2008

US, China cut rates


Moves seen as a start to global round of key cuts

NEW YORK: The United States and China kicked off what is likely to be a global round of interest rate cuts, part of a barrage of measures deployed around the world to fight a deep economic slowdown.

Norway’s central bank cut by a similar margin while China cut its benchmark one-year lending rate to 6.66% from 6.93%. Britain indicated it may lift self-imposed limits on government borrowing to counter a recession that stems from the financial crisis triggered by the collapsed US housing bubble.

“The markets got the (US) rate cut that they expected and a policy statement that was decidedly downbeat on the economy,” said Stuart Hoffman, chief economist at PNC Financial Group in Pittsburgh, Pennsylvania, after the US Federal Reserve cut interest rates by half a percentage point to 1% yesterday.

The Hong Kong Monetary Authority yesterday lowered its base rate to 1.5% from 2%, tracking the US Fed’s move as it sought to ease credit tightening.

Taiwan’s central bank also cut its benchmark discount rate by 25 basis points to 3%, the lowest since June 2007.

US regulators are finalizing a new federal programme to provide up to US$600bil in government guarantees of home mortgages to help prevent foreclosures, a source familiar with the talks said.

The International Monetary Fund approved an emergency short-term liquidity facility for emerging market economies to help them weather the credit crisis.

The Fed said the pace of U.S. economic activity appeared to have slowed markedly and it expected inflation to moderate as a result of lower energy and commodities prices.

Major US stock indexes rallied more than 2% before falling back to close lower.

Analysts welcomed the move but said it had already been priced in and the outlook remains grim.

“Bigger picture, I don’t think anyone believes that any interest rate cuts are going to affect the underlying issues surrounding mortgage-related and consumer-related credit,” said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

Norway’s central bank cut rates by half a percentage point to 4.75%, signalling more moderate cuts ahead to help shield the oil-fuelled economy from the crisis.

The interest rate cuts, and expectations of the US cut, lifted world stock markets and sent the US dollar plunging to its biggest one-day drop in 23 years, sparking a 7% surge in oil.

Japan’s Nikkei index ended up 7.7% and European shares climbed 7.5%.

Wall Street followed Tuesday’s 10% rally, its second-biggest rise ever, with a volatile day. The Dow ended down 0.82% and the S&P 500 fell 1.11%, reversing a rally after the Fed cut.

The Dow lost more than 300 points in the last 12 minutes after a news report raised questions about General Electric’s earnings outlook. After the close, GE said its CEO’s comments had been taken out of context and there were no new forecasts. The news service corrected its report, and GE stock rebounded after-hours. — Reuters


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