Emergency rate cut confirmed!
08 October 2008
Central banks around the world have cut interest rates by 50 basis points in an unprecedented move to breathe new life into the ailing global economy.
The Bank of England, the European Central Bank and the Federal Reserve along with central banks in Switzerland, China, Canada and Sweden have collectively cut rates by half a percentage point.
This takes the Fed's benchmark rate from 2% to 1.5% with the ECB cutting rates from 4.25% from 3.75%.
In the UK, the Monetary Policy Committee slashed rates by 0.5% to 4.5% a day ahead of the widely anticipated move. However, this makes it the biggest cut since November 2001 and the first emergency cut since the turmoil resulting from the 9/11 attacks.
The central banks said in a statement: 'The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted.'
Analysts had been calling for a rate cut of up to one percentage point. However, with UK inflation remaining stubbornly high - in August the Consumer Prices Index stood at 4.7% - speculation was rife at just how far the Bank would be prepared to go.
Howard Archer of Global Insight, says the move 'is a necessary step given that the economic downturn is deepening, money markets are frozen, equity prices are tumbling and the risk of prolonged, serious recession is seemingly growing by the day due to the serious financial sector problems.
'The various steps taken globally in recent days to try and alleviate the financial sector crisis have had very little impact. Consequently, it is clear that the authorities now believe that coordinated, wide ranging action is the only effective way of dealing with the problem,' he continues.
He adds that inflation could drop below 2% in the medium term due to 'the recent substantial deterioration in UK economic activity, very tight credit conditions and markedly increasing risk of a deep and extended downturn'.
Archer expects further rate cuts in November and December to bring rates down to 4% by the end of the year.
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