China Cuts Rates, Fed and Others Set to Follow

 
 
By Reuters -  |  Posted 2008-10-29
 
 
 

NEW YORK (Reuters) - China and Norway kicked off the latest round of global interest rate cuts, with the United States expected to follow later on Wednesday as policy-makers tried to soften the world's economic downturn.

Japan may cut on Friday and the European Central Bank and Britain are expected to add to the monetary easing next week as authorities remain fearful that the worst financial crisis in 80 years will cause a long global recession.

China increasingly appears to be the world's last center of growth and has said it would not fall victim to the crisis, which has ravaged the world's financial markets. China cut its interest rate to 6.66 percent from 6.93.

"I think this is also part of a coordinated move of global central banks to bail out the financial markets," said Zhao Qingming, senior economist at China Construction Bank in Beijing.

"Though other central banks have not announced rate cuts yet, we can see that they are on the way," he said.

The Federal Reserve is widely expected to cut U.S. rates by at least half a point to 1 percent, the lowest level since June 2004. The Fed announces its decision around 2:15 p.m.

Norway's central bank cut rates by 50 basis points to 4.75 percent, ending more than three years of tightening while signaling more moderate cuts ahead to help shield the oil-fueled economy from the crisis.

The rate cuts lifted stock markets for much of the day. Japan's Nikkei index ended up 7.7 percent and European shares climbed nearly 7 percent.

Volkswagen was Europe's biggest faller, however, diving more than 40 percent after Porsche took steps to ease a squeeze on short-sellers that had more than quadrupled the stock in days and briefly made it the world's most valuable company.

Wall Street followed Tuesday's rally, its second-biggest rise ever, with more modest gains. The S&P 500 was up about 0.75 percent.

Analysts said investors should not expect sustained rallies given the sharp economic downturn.

"Enjoy the party while you can," said David Buik, market commentator at Cantor Index in London.

The United States has entered a recession that will last longer and do more damage than any other since World War Two, the former head of the U.S. National Bureau of Economic Research, Martin Feldstein, was quoted as saying.

AMMUNITION

The Bank of Japan will consider cutting rates at a policy meeting on Friday but will watch market conditions before deciding, a source with knowledge of the matter told Reuters.

Bets on a quarter-point cut to 0.25 percent reversed a recent surge in the yen, sparking the dollar's biggest one-day gain versus the yen on Tuesday since 1974. The yen regained a small portion of those losses on Wednesday.

The European Central Bank and the Bank of England are expected to ease policy at their regular meetings next week. The ECB is expected to cut a half point off rates to 3.25 percent, according to a Reuters poll.

While that would bring the ECB's benchmark rate to its lowest in two years, policy-makers have the scope to deal with a worsening economy that should stabilize by late next year, ECB Governing Council member George Provopoulos was quoted on Wednesday as saying.

"I don't think that the ECB has exhausted its ammunition," he said in an interview with Dow Jones newswire.

BAIL OUTS AND LOSSES

Governments have pledged about $4 trillion to support banks and restart money markets to try to stem the crisis set off by the bursting of a bubble in the U.S. housing market.

As credit lines have dried up, a growing number of governments have had to look for help from global lenders.

The IMF, European Union and World Bank agreed to a $25.1 billion economic rescue package for Hungary.

Ukraine, Belarus, Pakistan and Iceland are also among the countries in various stages of seeking, securing or considering IMF help.

South Korea denied speculation it was seeking IMF support but said it would ease won liquidity requirements on banks to help bring down their funding costs.

IMF officials have said that the fund may need additional resources in a prolonged crisis and European Commission President Jose Manuel Barroso said on Wednesday China and the Gulf countries could do more to help the IMF support countries hit by the financial crisis.

There were more signs that the acute financing difficulties were easing. The closely watched rates that banks charge each other to borrow dollars fell as central banks continued to inject extra liquidity into the system.

However, sustained recovery is another issue, as the turmoil continues to spread throughout the financial and investment business.

Asset management groups Schroders Plc, Legg Mason Inc and Invesco Ltd reported funds under management fell due to the financial crisis and earnings declined.

(Reporting by Reuters bureaus worldwide; Editing by Tom Hals)