Rate cut not meant for financial markets, central banks say

Central banks around the world cut interest rates in the latest attempt to shore up the weakening economy today.

The US Federal Reserve, the European Central Bank and the Bank of England all announced 50 basis point cuts. The Fed's target federal funds rate fell to 1.5%, the ECB's main refinancing rate was cut to 3.75% and the Bank of England's bank rate fell to 4.5%.

Elsewhere, the Bank of Canada cut its bank rate by 50bp to 2.75%, the Swedish Riksbank cut the repo rate 50bp to 4.25% and the Swiss National Bank cut its rate 50bp to 2.5%. The Bank of Japan expressed "strong support" for the moves but did not act itself, saying that "in Japan, policy interest rates are very low and the monetary conditions remain accommodative" and the Japanese money market was still comparatively stable. It added that it would "swiftly examine possible ways to further enhance the effectiveness of monetary operations, including those pertaining to the BOJ reserve system".

The central banks said inflationary pressures had eased with the decline in fuel and other commodity prices, and said that "downside risks to growth" meant that "some easing of global monetary conditions is warranted". Even in the UK, where inflation is expected to break the 5% mark shortly, the Bank of England said that it should then retreat as the economy slows and retail energy prices fall.

The rate cut would not help the financial markets, the Bank added, saying its monetary policy committee recognised that "cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required".

The Fed, too, justified its action by saying "the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit" and did not mention effects on the banking sector.

But despite this, the stock markets reacted well, with the London FTSE 100 continuing to rise after a 7% plunge earlier today, reaching 4536 - still 1.5% down on the day.

See also: UK government unveils £50 billion bank recapitalisation plan