A MEASURE of the seriousness of the crisis that faces global financial markets was the unprecedented co-ordinated action yesterday by the world's major central banks.
The US Federal Reserve, the European Central Bank and four other central banks cut interest rates by 0.5 of a percentage point in their attempt to avert a global recession. Their bold action was an acknowledgement that the world economy is facing its greatest crisis since the Great Depression. The interest rate cut was necessary but it should have come much sooner.
The central banks in their joint statement recognised that as global economic activity weakens, recession has replaced inflation as the greatest threat. The International Monetary Fund (IMF) yesterday forecast a "major downturn" in the world economy. And the recent decline in energy and commodity prices has greatly eased inflationary pressures. Accordingly, lower interest rates represent the right policy response as economic conditions deteriorate, exacerbated by the credit crunch and by the paralysis gripping financial markets, which has curtailed bank lending.
The co-ordinated rate cuts represent an attempt to boost market confidence at a time of financial turmoil. Banks remain unwilling to lend either to each other or to businesses and consumers. And central banks have become the lenders of last resort in a bid to boost liquidity in short-term money markets. How effective interest rate cuts will be in unblocking frozen credit markets remains uncertain, given the continuing market nervousness and uncertainty about the solvency and losses in the banks themselves. This crisis of confidence in the financial health of the banks has been reflected in the sharp fall in global equities in recent weeks.
The package of measures introduced yesterday by the British government to rescue the UK's banking system and the global rate cut represent a determined attempt to restore confidence in financial institutions. The immediate response of stock markets, in Dublin as elsewhere, has not been encouraging. It suggests much more needs to be done to rebuild trust and to renew investor and public confidence in the banks. Nevertheless, for the Irish economy the impact of both moves remains positive and welcome. In particular, lower borrowing costs, arising from the ECB rate cut, should help business and provide mortgage holders with some relief through reduced monthly loan repayments. And the Government, given its financial guarantee to banks, underwritten by the taxpayer, is well placed to ensure that the banks pass on the rate cut to their customers.
Over recent months, governments and central banks have found themselves well behind the curve in tackling what the IMF yesterday described as "the most dangerous shock in mature financial markets since the 1930s". Hopefully, yesterday's co-ordinated response by the world's central banks suggests they may have begun to get the measure of the huge challenge they face. A global financial crisis requires a global response and may require further co-ordinated interest rate cuts to avert a 1930s-style catastrophe.