WASHINGTON (Reuters) - Central banks around the world cut interest rates on Wednesday in their first broadly coordinated policy action in history, as fears of a deep recession banished recent worries over inflation.
In an attempt to stem the worst global financial crisis since the 1930s, the central banks of the United States, the euro zone, Britain, Switzerland, Canada and Sweden all lowered official rates by a half-percentage point.
But stock markets, traumatized by cascading losses and the collapse of some of the oldest names in banking, took only mild comfort. Strains in credit markets continued unabated, begging the question of what more policy-makers could do and whether more cuts would follow.
European Central Bank President Jean-Claude Trichet hinted at this option, pledging that markets could count on central banks to “take the appropriate decisions.”
The People’s Bank of China, participating for the first time in a globally coordinated interest-rate move, also lowered its key rate, but by a more modest amount.
The Bank of Japan, whose rates are just 0.5 percent, did not ease but strongly supported the coordinated action.
“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,” the central banks said in a joint statement.
The Fed cut the overnight interbank federal funds rate to 1.5 percent — the lowest since September 2004 — from 2.0 percent. It also lowered the discount rate it charges on direct loans to banks by a half-point to 1.75 percent.
The ECB also cut by a half-point to 3.75 percent as did the Bank of England, taking its rate to 4.5 percent.
China cut its key rate 27 basis points and its reserve requirements for banks by half a percentage point.
“This is the first such fully coordinated and synchronous rate cut by a number of key central banks,” Morgan Stanley economists wrote in a note to clients. “This is a very important signal to markets and the public at large. Leadership was required, and leadership they showed.”
The Fed and ECB lowered rates on the same day in the aftermath of the September 11 attacks, and at the time the ECB referenced the Fed’s action when announcing its cut. But there was no joint statement or global dimension to the move as there was with the latest salvo on Wednesday.
U.S. Treasury Secretary Henry Paulson, speaking at a news conference, called for further collective action.
“Governments have and must continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions through the provision of capital ... and protect the savings of our citizens,” he said.
The International Monetary Fund commended the coordinated drive but said more action may be needed.
“More may be needed ... particularly in Europe,” the IMF’s chief economist, Olivier Blanchard, said at a news conference.
In July the ECB raised rates by a quarter point to 4.25 percent, while the Bank of England had held its key borrowing rate at 5.0 percent since April 10 and the Fed had held still since the end of April.
But policy-makers capitulated and put aside inflation concerns in the interest of growth, after shattering losses on property loans and derivative positions by banks in the United States and Europe in particular in the past year.
“It’s a very important mark of intimate cooperation and an important mark of confidence,” ECB President Jean-Claude Trichet told Reuters Television.
“We have to ask all institutions, all market participants to keep their composure ... They can count on us to continue to inspire confidence and take the appropriate decisions,” the veteran French policy-maker said.
French President Nicolas Sarkozy, current holder of the European Union’s rotating presidency, said the EU was working on coordinated measures and promised swift action.
The central banks’ rate cuts follow months in which they injected hundreds of billions of dollars into credit markets to try to prevent them from freezing entirely.
Stock markets in Europe closed with heavy losses, and Wall Street suffered wild swings. The Dow Jones industrial average closed 209 points lower, though it had been up more than 120 points at one stage.
Other markets suggested only a little loosening in strained credit conditions. For example, the two-year U.S. interest-rate swap spread, a barometer of risk aversion, narrowed slightly to 132.25 basis points from 133.75 on Tuesday.
Governments have been frantically bailing out banks to keep them afloat and try to keep credit flowing. The Bank of England praised the British government’s plan to boost bank liquidity, saying rate cuts would not be enough.
British Prime Minister Gordon Brown urged further steps to guarantee interbank lending. According to a G7 source, Brown called for national guarantees to restore trust between banks in a letter sent to the governments of major economies.
Finance ministers and central bank chiefs from the Group of Seven — the United States, Japan, Britain, Canada, Italy, Germany and France — meet in Washington on Friday and crisis response will top their agenda.
Hong Kong earlier slashed the borrowing rate it charges banks by a full percentage point, a day after Australia’s central bank delivered its biggest interest rate cut in 16 years, also a full point.
Additional reporting by David Lawder, Lesley Wroughton and Mark Felsenthal in Washington, Sumeet Desai in London, Krista Hughes in Frankfurt, and John Parry in New York; Writing by Mike Peacock and Alister Bull, Editing by Chizu Nomiyama