Asia central banks cut rates to ease credit crisis

09 October 2008 06:48  [Source: ICIS news]

By Pearl Bantillo

 

(Recasts lead for clarity and adds details)

 

SINGAPORE (ICIS news)--Asian central banks cut interest rates on Thursday, following in the footsteps taken by their Western counterparts a day earlier in an attempt to prevent the financial crisis from spiralling into a global recession.

  

South Korea shaved a quarter point off its seven-day repurchase rate to 5.0%, Taiwan cut the discount rate on 10-day loans to banks by 25 basis points to 3.25% and Hong Kong reduced its base rate by a total of 150 basis points to 2.0%.

 

China announced on Wednesday it would reduce its lending and deposit rates by 27 basis points effective from Thursday, after the US Federal Reserve and five other major central banks implemented half-point rate cuts.

 

The markets’ response to the coordinated rate cuts had been muted. At 12.47 Singapore time (4:47 GMT), Japan’s Nikkei 225 rose 1.73% to 9,362.74 points, South Korea’s KOSPI Composite index gained 1.24% at 1,302.64 and the Hong Kong Stock Exchange gained 2.65% at 15,841.42.

 

The IMF, in its World Economic Outlook report just released, reiterated the need for coordinated financial and macroeconomic policies to prevent a prolonged global economic downturn.

 

“The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s,” the IMF said in the report.

 

World growth would fall to its slowest pace since the 2001-2002 recession at 3.9% this year, falling from 5.0% in 2007, with further weakening expected in 2009 at 3.0%, according to the report.

 

“The longer the financial crisis lasts, the more the emerging economies’ growth is likely to be affected,” the IMF said.

 

Growth in emerging and developing economies would markedly slow to 6.1% in 2009, from 6.9% in 2008 and 8.0% in 2007, added the report.

 

The US economy would barely grow in 2009, even coming from a very low base of 1.5% this year, the IMF said.

 

“In advanced countries, the crisis is now being driven by a downward spiral of loss of confidence and trust,” said Olivier Blanchard, chief economist at the IMF.

 

“With the right macro and financial policies - and these policies are available - we can ride the storm, and expect a recovery to start in the course of 2009,” said the IMF’s Blanchard.

 

“It [coordinated rate cuts] is a step in the right direction,” he said.

 

United Overseas Bank senior treasury economist Thomas Lam said that these efforts might have some drawbacks, however.

 

“It could convey a sense of panic and confusion, which could potentially lead to a negative feedback in prices of riskier assets,” he said.

 

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By: Pearl Bantillo
+65 6780 4359

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