Attacks likely to unleash global easing - analysts

With world financial markets almost paralysed by the tragic events in the United States, analysts see a real possibility for …

With world financial markets almost paralysed by the tragic events in the United States, analysts see a real possibility for a coordinated easing in monetary policy on a scale not seen since the dark days of the 1987 stock market crash.

As equity markets slide, at least those that remain open, and investors stampede into safe haven assets, analysts fear the blow to confidence and an acute aversion to risk will tip the teetering world economy into recession.

In response, central banks around the world are and will stand ready to flood markets with liquidity, and actual cuts in interest rates are the obvious next step.

"We may see emergency rate cuts across the globe as happened after the Wall Street crash in 1987," said Mansoor Mohi-uddin, an economist at UBS Warburg in Singapore. Signs were already afoot that policy makers were prepared to write a blank cheque to calm markets.

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Early this morning the Bank of Japan announced it would do its utmost to avoid disruption in financial markets by providing ample funds to the banking system.

It was followed in short order by the Reserve Bank of Australia and the central banks of South Korea and Singapore.

"We expect the central banks are going to be very proactive in the next few days, both in providing liquidity as well as trying to dampen exchange rate volatility," said Ron Leven, currency strategist at Lehman Brothers in Tokyo.

Japanese Finance Minister Masajuro Shiokawa made the point clear, saying foreign exchange intervention may be necessary if the currency market remained volatile.

The dollar fell some three yen to below 119 yen in the wake of the attack, though analysts emphasised the move was largely a mark-down by jittery interbank dealers and actual selling volumes had not been huge.

The reaction in equity markets was more severe, however, with the LondonFTSE index suffering its biggest one-day points fall since the 1987 crash.

The havoc showed so sign of receding in Asia with the benchmark Nikkei 225 share index slumping five per cent to below the psychological 10,000 level for the first time in 17 years while the Korean Kospi dove no less than 12 per cent.

"The feeling is that if policy makers want to save confidence they will have to offer all the liquidity they can," said Bill Belchere, head of fixed income, research and economics at Merrill Lynch in Singapore.

It was no surprise then that in the fervid atmosphere of forex dealing rooms rumours quickly spread that the Federal Reserve was about to announce an emergency US rate cut, to be followed by much of the developed world.

However, Belchere cautioned that such a move might smack more of panic rather than of prudent proactive policy.

"They really have to first assess the damage done to New York, to consumer confidence and the broader economy," he said. "In the meantime they can provide plenty of liquidity and then move to rate cuts in good time".

The Fed has a scheduled policy meeting on October 2nd and analysts suspect the bank may hold fire until then, though they added that the chance of a return to more aggressive 50 basis point cuts must surely have risen.

"With the global economy more or less on its knees, the last thing it needed was a shock like this," said Michael Workman, head of economic research at Commonwealth Bank of Australia in Sydney.

"The policy implications are pretty clear and once the US money markets re-open we expect them to quickly price in a lot more easing than anyone expected just a day ago, he added.

Analysts did note that the mass policy easing that followed the 1987 stock market crash worked well in supporting confidence and economic growth.