By Simon Kennedy
Nov. 1 (Bloomberg) -- The Reserve Bank of India's surprise interest-rate cut ended a week of reductions that spanned the globe from Beijing to Washington, with more to come next week in Europe and Australia.
The Indian central bank's action today followed a Federal Reserve decision to reduce U.S. borrowing costs to match the lowest level in a half-century. The Bank of Japan yesterday cut its benchmark rate for the first time in seven years and China pared its key rate for a third time in two months. Central banks in Norway, Slovakia, South Korea, Taiwan, Israel and across the Middle East also eased credit.
Policy makers are fighting to avert a prolonged recession in the global economy as the credit crisis enters its 15th month and spreads beyond industrial countries. Officials are signaling more cuts are likely and the European Central Bank and Bank of England both set policy on Nov. 6.
``This was the week central banks got shocked into action,'' said Stuart Thomson, who helps oversee $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``They have been surprised by the sudden slump in economic activity, but still have a long way to cut.''
India's central bank today pushed its repurchase rate down for the second time in two weeks, taking it to 7.5 percent from 8 percent.
More Fed Cuts
BOJ Governor Masaaki Shirakawa yesterday cast the deciding vote to reduce the key overnight lending rate to 0.3 percent, the lowest in the industrial world, from 0.5 percent.
Shirakawa acted after Japan's Nikkei 225 Stock Average this week slumped to its lowest since 1982. The bank slashed its growth forecast for the year ending in March to 0.1 percent from 1.2 percent predicted in July, and may bring interest rates to zero as it promised to promote ``accommodative financial conditions.''
Fed Chairman Ben S. Bernanke and his colleagues are also signaling they may cut their benchmark rate further after lowering it to 1 percent as ``downside risks to growth remain.'' The economy contracted by the most since 2001 in the third quarter and Fed Bank of San Francisco President Janet Yellen said on Oct. 30 that rates may head to zero if economic pain persists.
``We could, potentially, go a little bit lower than'' 1 percent, Yellen said in Berkeley, California. ``We would do it because we are concerned about weakness in the economy.''
China's Growth Slows
The financial crisis last month spread from industrial economies such as the U.S. and Japan to engulf emerging markets that had been the world economy's last remaining source of strength. Now, policy makers in those economies are easing monetary policy too.
India reduced rates today and also shrank the amount of deposits that lenders need to set aside as reserves by 1 percentage point to 5.5 percent.
The People's Bank of China on Oct. 29 reduced its one-year lending rate after economic growth slowed to 9 percent in the third quarter from 11.9 percent in 2007 as export markets shrank. Elsewhere in Asia, South Korea slashed its rates by a record 75 basis points in an emergency shift and rates also fell in Taiwan and Hong Kong.
Oil-producing nations are also resorting to lower rates after the price of crude dropped by half from a July record of $147.27 per barrel. Norway's central bank cut its benchmark by a half-percentage point for the second time last month. Saudi Arabia, Kuwait and Bahrain, which tend to shift their interest rates in line with the U.S. to maintain currency pegs to the dollar, also followed the Fed in cutting.
Beyond Interest Rates
Not all central banks are easing. Iceland this week unexpectedly raised its main rate to 18 percent, the highest in at least seven years, as it battles a currency crisis and possible hyperinflation with the help of the International Monetary Fund.
Central banks are going beyond interest-rate policy to confront the unprecedented crisis with unconventional measures. The Fed on Oct. 29 agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore to unfreeze money markets, the first time it has extended such measures to emerging nations. Meantime, the ECB gave Denmark access to 12 billion euros.
Economists forecast that the onset of a recession in Europe will force the ECB and the Bank of England to lower their benchmark rates on Nov. 6 by a half-point to 3.25 percent and 4 percent respectively.
Weber's View
Both will cut to 2.5 percent by the middle of next year, according to median forecasts in two surveys. That would be the fastest pace of easing in the ECB's history.
``If the economy cools, then rates have to come down rapidly so one doesn't risk falling behind the curve,'' ECB council member Axel Weber said on Oct. 30. Bank of England policy maker David Blanchflower said Oct. 29 that rates must drop soon and ``significantly'' to stave off the threat of deflation.
Australia's central bank may also cut rates on Nov. 4, after lowering them by 1 percentage point to 6 percent last month, the biggest reduction since 1992.
At JPMorgan Chase & Co., economists are predicting their global interest rate measure will fall to 2.16 percent next year, the lowest since it was first devised in the mid 1990s, from 3.21 percent yesterday. They estimate the global economy will contract in the current and subsequent quarters.
``Rate cuts are going to be pretty broad,'' said Joseph Lupton, an economist at JPMorgan who previously worked at the Fed. ``The idea has solidified pretty sharply that the world economy is going to fall pretty hard here and some good old- fashioned monetary easing is in order.''
To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net
Last Updated: November 1, 2008 06:42 EDT
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