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Commentary: Major economies must now act together to support their banks
Chris Blackhurst7 Oct 2008
Australia has cut its rates and the Sydney stock market responded positively, closing up nearly two per cent. Pressure is growing for our own Monetary Policy Committee to follow suit on Thursday.
But at the risk of coming across as Eeyore, at a time when everybody is clutching at good news, however small, it's important to add a note of caution. Australian rates were already higher than ours - the full percentage point reduction took them to six per cent - and it was coupled with the Reserve Bank of Australia joining the Bank of Japan to pump more than $11 billion into the money markets.
Still, Australia's move has added to the calls for the Bank of England to do something to help ease the crisis. A cut of a quarter to a half of one per cent now looks likely. Anything more, say a full one per cent, will smack of panic and send the wrong signal - a criticism that is being levelled at the Australian authorities. But lowering rates would provide a boost to UK borrowers, about half of whom hold tracker mortgages and would instantly benefit.
The hope must be that the fillip a cut would give to their spending power will restore much-needed confidence to a battered UK economy. Where recently the Bank was worried about inflation, now it is lack of growth that is causing alarm - and far outweighing inflationary fears.
It isn't, however, the Bank's base rate that has been provoking the terrible anxiety of the past weeks and days. The key measure of Libor, the level at which the banks lend to each other, is far too high - currently 6.26 per cent versus base rate of five per cent. In the US, the gap is even higher - there the interbank lending rate is 4.28 per cent, more than twice their federal funds' rate of two per cent. For the banks to start believing in each other and for credit to start flowing again, the rate at which they lend to each other has to come down.
On its own, a move by our Bank of England is not likely to achieve that object. It would indicate a degree of UK optimism but not sufficient to soothe fevered brows in what is a global maelstrom. A co-ordinated approach, involving the other central banks, would be more likely to have the required wider, positive impact. Even then, the markets could be looking for more. It's not the cost of money that is the problem but the mood - banks have to start trusting each other, people must have faith again. For that to occur, for there to be a collective sigh of relief, governments are going to have to stand four-square behind their banks. The present mess, where some countries have guaranteed all their bank deposits and others have not, is only fuelling the sense of disarray and lack of direction. An across-theboard response from the major economies, slashing rates, injecting money into banks by taking equity stakes and promising to honour any bank failures, is what is now required.
Of course, that comes at enormous potential cost and risk to their respective taxpayers. But they have no choice: Monday's calamitous falls, effectively saying the passing of the Paulson rescue plan in the US had not done the trick, have seen to that.
The Bank's lack of room for manoeuvre is highlighted by one simple fact: some of yesterday's drama was caused by investors being disappointed that a snap rate cut was not forthcoming.
Their gloom if there isn't one from the Bank on Thursday could be awful to behold.
