Tuesday, December 09, 2008

Central Banks Slash Rates

Last week, Joellen Perry in the Wall Street Journal announced: "Central Banks Deliver Sweeping Global Rate Cuts." But Perry warned, "However, Reductions May Be Losing Impact as Turmoil Continues."

The Financial Times' Dave Shellock reported "A series of aggressive interest rate cuts by European central banks failed to lift the mood in financial markets yesterday as investors continued to fret about the global economic and corporate outlook.

"Government bond yields on both sides of the Atlantic touched historic lows, credit spreads remained at distressed levels and oil prices fell, leaving equities struggling to gain traction."

3 comments:

Kevin T said...

Even though many banks across the world are cutting rates, people are still not happy. People have no trust in their banks to keep using them. Banks must regain the trust of the people to see improvement and more population interaction with them. It will take time to reestablish these bonds between the people and their banks. Cutting rates might be the first step to regaining peoples' trust bt other steps must be taken as well.

Kenneth Shockley said...

Isn't the target rate something ridiculous like 0-0.25% now for the Fed? I'm not entirely sure how cutting rates that low is going to help the economy... I can see cutting down to 1%, maybe to .5%, but saying that banks should lend money for free to one another, that just doesn't make any sense. From one of the articles you gave us for the final I would say that lowering the interest rates should help beat deflation, but it's not like we haven't had a couple years of deflation in the past. Not sure how I feel about this, time will tell I guess.

Mike Shockley said...

It seems to me it's a tale of two banks.
The "money center banks" have either no demand for loans or so many loans on their books they are unable (or just afraid) to lend to customers - thus are forced to lend to one another (or buy Treasury issues). By cutting rates (or putting the official rate to the actual market rate), the Central Bank is signaling these money centers to lend money - not buy treasuries.

The neighborhood banks have funds to lend and see a demand for the loans - but the Fed's move will actually cause them more problems as they compete for savings. It will take time for the neighborhood bank to reposition their deposits (CD rates in particular) to reflect the lower rates - squeezing their profit margins.