Responses to surprise rate cut
November 18, 2008
This week saw central banks around the globe take the unprecedented step of cutting base rates in order to try and rescue the world’s financial markets, breathe life into failing economies, and restore the confidence of consumers. Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor of the Exchequer, called a special press report earlier this week, and announced that the Bank of England had cut the base rate from 5% to 4.5% reflecting a half a percent cut.
Other central banks around the world also cut rates, with the US Federal Reserve, the European Central Bank, and central banks in Sweden, Switzerland, and Canada all cutting their rates by 0.5%. However, although the news was welcomed by industries and consumers they had little effect on the markets on the day that they were announced. The news of the rate cut came just twenty four hours before the scheduled Monetary Policy Committee meeting, where the rates are normally decided, and was announced alongside a package of measures to rescue the banking system in the UK.
The responses to both the rate cut and the package of banking rescue measures were greeted with mixed responses from both industry officials and consumers. One official said: ‘Coupled with the plan to shore up the financial system today’s co-ordinated moves should help arrest the potential slide into depression.’
However, another stated: ‘We fear that there is still a lot more work to do. The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become.’
One economist said: ‘It has taken far too long for the government and the Bank of England to recognise the scale of threat posed by the seizing up of the credit system.’
The Bank of England has said that the rate cut was warranted because the level of inflation is likely to start coming down after monthly of spiralling out of control. In a statement the central bank said: ‘Although inflation was likely to rise above five per cent in the coming months, it will then drop back towards the two per cent target. Some easing of global monetary conditions is therefore warranted.’
An official from one accountancy firm said: ‘In many ways we are in the last chance saloon. The same-day response to the financial crisis from the Bank of England and Treasury is certainly unprecedented and let’s hope this has the desired impact. It must work as there is not much left in their armoury. The key now is for the markets to respond to this intervention with reason and a measure of realistic optimism. We must now begin to help talk ourselves out of a recession, as we certainly have helped talk ourselves into one.’
Another economist stated: ‘The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become. More generally, the economic and financial imbalances have taken years to build up and may take just as long to unwind.
Accordingly, we expect today’s moves to be the first in a series - whether coordinated or at scheduled meetings - with rates eventually falling to 2.5% in the UK, 2.0% in the eurozone and just 0.5% in the US.’
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