Record rate cuts: Global Central Banks props up recession hit consumers
LONDON/TOKYO (Reuters) – Bank of England will cut interest to new 300 year low, Sweden cut its rates by a record 175 basis points on Thursday, prompting speculation of dramatic cuts elsewhere in Europe to try to stop a global slump spreading faster than policymakers had anticipated.
Japanese companies slashed spending, showing the economy was in a deeper recession than the government estimated, after U.S. data showed private sector employers axed jobs at the fastest pace in seven years.
"With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since World War Two appears to be on track," JPMorgan economists said.
In a deeper than expected cut, Sweden’s central bank chopped its key interest rate by a record 175 basis points to 2.0 percent to prevent the economy sliding further into recession.
The Riksbank said it expected rates to remain at that level over the coming year. There was an "unexpectedly rapid and clear deterioration in economic activity since October," it said.
The Reserve Bank of New Zealand sliced interest rates by a record 150 basis points to a five-year low of 5.0 percent and said it would probably have to cut rates again.
Indonesia also made a surprise cut in its key interest rate, by 25 basis points to 9.25 percent, the first since December 2007 as the government sought to protect the economy.
Britain and the European Central Bank were due to announce rate cuts later on Thursday and with Britain heading into recession, the Bank of England could slash rates to their lowest in more than half a century.
A rapid deterioration in business conditions has raised fears Britain could be heading for a much deeper downturn than anybody expected.
"They need to do something aggressive again," said George Buckley, chief UK economist at Deutsche Bank,.
Analysts expect a 50 basis point reduction from the European Central Bank and twice as much from the Bank of England.
The cuts forecast by analysts in Reuters polls would take the euro zone’s interest rates to 2.75 percent and Britain’s to 2 percent. U.S. interest rates will fall below 1 percent if the Fed cuts again as expected later this month.
European stocks reversed early losses to rally on Thursday, rising for the third session in a row as investors hoped the deep cuts would help soothe the global economic slump.
"It could help find a bottom for stocks, but to say if the real floor is in sight, it’s too early for that," said Achim Matzke, a European analyst at Commerzbank in Frankfurt.
Asian shares fell as investors braced for a sharp turn lower in the global economy and sought safety in U.S. government debt, pushing benchmark yields to five-decade lows. Wall Street was seen opening broadly unchanged, breaking a two-day rally.
French President Nicolas Sarkozy was due to unveil measures later on Thursday to help France withstand the crisis just as the government announced that the unemployment rate rose in the third quarter to 7.7 percent.
In Zurich, Swiss bank Credit Suisse said it was cutting another 5,300 jobs as it revealed a net loss of about 3 billion Swiss francs ($2.5 billion) in October and November.
That will add to the more than 100,000 jobs that have been lost in the financial industry as banks across the world cut costs to cope with the worst crisis since The Great Depression.
CHINA STILL CONFIDENT ON GROWTH
The crisis has devastated industries, including the U.S. auto industry, which is lobbying Washington for a bailout.
General Motors Corp and Chrysler LLC are considering accepting a pre-arranged bankruptcy as the price of getting a multi billion dollar government bailout, Bloomberg reported, citing a person familiar with internal discussions.
In China, Zhou Xiaochuan, head of the People’s Bank of China, expressed confidence the country could sustain economic growth and financial stability but said "timely, effective and pre-emptive measures" were needed.
China slashed interest rates last week to spur an economy now threatened by a crisis that began with U.S. mortgage defaults last year. Australia and Thailand followed this week to avoid recession.
As interest rates approach zero, central banks are considering other options to revive their economies.
A senior U.S. Federal Reserve official said on Wednesday purchases of government debt might help tackle deflation, echoing remarks from Fed Chairman Ben Bernanke.
"You also do it to stimulate the economy when further reductions in interest rates are infeasible," Richmond Federal Reserve President Jeffrey Lacker told reporters.
Japanese officials are talking of the risk of deflation, after emerging from a decade of falling prices in 2005.
"There’s a growing chance that Japan’s economy will remain in recession until the second quarter of next year," said Kyohei Morita, chief economist with Barclays Capital.