U.K. & E.U. Central Banks Need To Follow With Rate Cuts

Yesterday’s FOMC emergency intervention of 75 basis point rate cut to 3.5% was believed to be part of a global coordinated rate cut effort in effort to stave off loan default risks pouring turning counterparty risk into widespread counterparty  defaults. 

The Canadian central bank followed suit with a rate cut of 0.25% down to 4.0%, but that was essentially the only matched effort.  It was also deemed a small effort.  So far the coordinated global intervention from central banks hasn’t happened.

It is believed that the Bank of England AND the European Central Banks need to follow suit with rate cuts.  More than rate cuts need to be seen, but this is the easiest start that doesn’t require legislation and doesn’t require other stimulus packages that will take 60 to 120 days to be enacted.  The Bank of England currently has a 5.50% benchmark rate and the ECB’s benchmark rate is currently 4.0%.  Both the U.K. and the E.U. have room to bring rates down.  It almost appears as though these central banks are more worried about inflation more than they are about trying to keep up growth or propping up financial markets.

These two central banks should look at the drop in commodity prices in recent days as the global inflation and global growth trades are being partly to largely unwound, depending on which country you are in.  They will suffer from U.S. counterparty risks too if there is any major shoes that drop.  If they wait for 30-day to 90-day old data to confirm the facts for posterity, it may be too late.

The good news is that there is always today and two more days this week after today.  Yesterday we had noted the chances that the FOMC would provide an intermeeting emergency intervention, or if not we were going to probably see a 1,000 point drop in the DJIA.

Who knows, maybe the central bankers and their wives from England and Europe want to be able to use that overwhelming strength of the Euro to come shopping in New York City before they lower rates.  They better take those trips quick and then follow these rate cuts, otherwise they’ll get to feel this same pinch.  The FOMC averted a huge drop in the U.S. markets that also propped up European and Asian markets.  Its now the turn of the U.K. and the E.U.

Jon C. Ogg
January 23, 2008