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Global central banks coordinate policy and ease by 50bp

Thu, Oct 9 2008, 07:01 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Global central banks coordinate policy and ease by 50bp. The world’s major central banks took a historic step today, easing benchmark rates by 50bp in a coordinated announcement at the start of US trading. The US Fed, the European Central Bank, the Bank of England, the Bank of Canada, Sweden’s Riksbank and the Swiss National Bank issued a joint statement citing the recent “intensification of the financial crisis” and a “reduction in inflationary pressures” as the reasons for the move. The People’s Bank of China joined in with a 27bps cut to its 1 year lending rate too. The BoJ did not cut rates but “supported the action”. Prior to the announcement markets were once again paralysed by extreme risk aversion. Dow futures at one stage were down almost 400pts while the European indices were down around 8%. Early offshore trade saw the AUD drilled from around USD0.7100 to lows near USD0.6450 while the NZD fell from around USD0.6250 to lows near 0.5790.

In the wake of the coordinated easings risk appetite recovered immediately. European equities still finished down around 5-6% across the board but one suspects some catch up is in order with the DJIA trading up around 80pts in mid afternoon NY trading. EUR/USD was surprisingly calm either side of the coordinated CB easings, grinding higher throughout offshore trading from lows near 1.3550 to highs near 1.3750 in afternoon US trading. AUD/USD and NZD/USD both looked better bid as the day wore on. Into late US trading the AUD recouped around US3 1/2 cents to be trading just shy of USD0.6800 while the NZD rose US3c to USD0.6125. Sentiment is running high that the RBNZ will ease policy as soon as today in sympathy with the world’s major central banks. The unprecedented actions among the world’s major central banks today provided a circuit breaker but such action had been expected and the overall reaction still looks somewhat muted. AUD/USD for example will still finish down a good US3 cents from its Sydney close yesterday while the 80pt bounce in the Dow only retraces a fraction of the previous day’s near 550pt slide.

UK government announces banking sector plan. The Prime Minister and Chancellor announced their version of a plan to get the banking system working again. They will invest between £25-50bn in preferential shares in the main High St banks who request it (partially nationalising them); provide £250bn in loan guarantees (for a fee) to allow the banks to refinance their debt; and via the Bank of England, provide a further £200bn in liquidity. This plan differs from the Paulson plan to take toxic assets off the US banks’ balance sheets by actually bolstering the capital base of the banks.

US pending existing home sales up 7.4% in Aug. The West is leading the charge, up 8.4% in August, boosted by the sale of foreclosed properties which, according to some measures, are being sold for prices, on average, about 30% lower than a year ago.

German industrial production up 3.4% in Aug, its strongest gain since 1993! Totally in contrast to the business surveys which suggest the industrial sector is entering recession. Rightly, it didn’t stop the ECB from cutting rates 50bp today, so clearly they understand that a rogue healthy number doesn’t alter the bigger picture.

UK inflation peaking? A private sector report showed high street price inflation slowing from 3.8% yr to 3.6% yr.

Canadian housing starts up 0.1% in Sep, but down 21.5% yr, so the housing sector downtrend remains in place.

Outlook

The extraordinary ongoing developments in world financial markets make it impossible to forecast the NZD with any confidence (though more volatility is a near certainty). However, it is important to recognise that the exchange rate serves as an important safety valve for the economy – the NZD will fall as far as it needs to in order to buffer the New Zealand economy from the worst of the financial crisis.

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Published on  Thu, Oct 9 2008, 07:05 GMT