Global policymakers have come out in force today, launching a determined attempt to pull ahead of the curve and halt the precipitous deterioration in market sentiment. They have not succeeded yet. They must keep trying. They must keep hitting the market hard in the next few days with decisive measures to ensure stability in the financial sector and to offset the ongoing economic downturn. Earlier action would have been better. Coordinated EU action would have been better. But it is not too late, and what we are beginning to see now is a very powerful policy response. Global policymakers have their back against the wall, they have nowhere to run, nowhere to hide—do not underestimate how hard they are going to fight now. Markets have been overcome by panic and hopelessness, and what we are seeing is like a bubble in reverse: it is irrational, contagious and seemingly unstoppable—but like all bubbles, this too will pop. And this is a bubble that policymakers should not be afraid to prick. They have to keep hitting harder, better, faster, stronger, because the next few days will be crucial.
Today the Fed, ECB, Bank of England, Swiss National Bank, Bank of Canada and Riksbank simultaneously cut interest rates by 50bp, and were joined by China which cut interest rates by 27bp. The Bank of Japan expressed strong support for the action, but was obviously not in a position to join, its policy rate being still at 0.50%.
It was a strong display of unity, and most importantly it was a clear signal that all central banks are fully aware of the need for decisive action. The ECB more than reversed the rate hike enacted just over two months ago, acting on the decisive change of stance outlined last week. Moreover, the fact that China participated in today’s action is extremely important. It shows that the coordinated reaction is truly global, including now one of the key emerging markets. China is a key global player in terms of both firepower, measured by FX reserves, and growth potential. The fact that China is involved in tackling the global financial crisis further increases the chances of success.
The coordinated rate cut came as European countries rush to launch national plans to stabilize their national banking systems. Announcements of stabilization plans came from Spain yesterday, in the UK this morning, in France later today, and discussions are on-going in Italy. I expect more countries will follow. A coordinated action would have been much better, but this is a good second best.
The UK’s plan is extremely well structured and impressively forceful. It addresses capitalization, liquidity and funding—the three key causes of financial paralysis. It includes clauses aimed at pushing banks to intermediate the liquidity into the real economy. And it deploys virtually unlimited firepower. (See Chiara Corsa’s note of earlier today for a clear and detailed assessment of the plan).
