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Global economy gets global action on rates

In all, 22 nations have lowered interest rates since Monday.

By Staff writer of The Christian Science Monitor / October 9, 2008

Intense: Jennifer Klesaris worked the floor of the New York Stock Exchange Oct. 8.

RIchard drew/AP

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We get it. And we can move more quickly, and in a more united fashion, than you think.

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That's the message the world's major central banks may be trying to send financial markets with their surprise Oct. 8 announcement of coordinated interest rate cuts.

A month ago, some European central bankers still sounded as if inflation, not recession, was their main concern. The US Federal Reserve seemed reluctant to cut its main rate any further.

But volatile stock prices and frozen credit markets have now pushed the world economy to the brink, and central bankers may have felt they needed to do something dramatic to stop rising panic and fear.

"In some senses this is a feature of globalization. These people understand they are all in this together," says Edwin Truman, senior fellow at the Peterson Institute for International Economics and a former assistant Treasury secretary.

The US Fed reduced its key rate from 2.0 to 1.5 percent in the unprecedented joint action. That Bank of England cut its rate by a half-point, to 4.5 percent. The European Central Bank also lowered its rate a half point, to 3.75 percent.

Central banks of China, Canada, Sweden, and Switzerland also cut rates. The Bank of Japan said it strongly supported the joint effort, though Japanese rates are in essence too low to go down much further.

"The recent intensification of the financial crisis has augmented the downside risks to growth," said the Fed in a statement explaining the action.

Some major US banks, such as Bank of America and Wells Fargo, followed suit with their own half-point reductions. Thus, borrowers whose floating loans are tied to prime rates could see a reduction in home-equity, mortgage, or other costs.

"It's important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," said White House spokesman Tony Fratto.

World stock markets continued to gyrate in the hours after the reductions were announced. In Britain, the main market index closed down more than 5 percent. Germany and France closed down even more.

At time of writing, the Dow Jones Industrial Average was also declining but remained volatile.