My bearish friend Nouriel Roubini has a typically lucid and impassioned comment up calling for central banks worldwide to cut aggressively and now. He cites Canada’s surprise rate cut today as an example, and continues:
Today the Bank of Canada started to get it by, unexpectedly, cutting its policy rate by 25bps; but 25bps is puny given the liquidity crunch in global markets that has also spread to the Canadian markets. 50bps or more was the minimum necessary to deal with a Loonie that is lunatically high and a massive financial contagion from the US to the Canadian financial markets.
This week the Bank of England and the ECB will meet to decide on monetary policy and markets are expecting both central banks to stay on hold. Keeping policy rates in the UK and the Eurozome steady now will be a mistake The Sterling Libor rate is literally going through the roof : yesterday the Sterling 1 month Libor spiked more than 60bps from Friday levels to its highest level for 9 years following a similar move in the Euro Libor at the end of last week. Thus, nothing short of a policy rate cut – justified also by the sharp slowdown of economic growth in the UK and the beginning of a housing bust – will make a difference in UK financial markets.
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Cutting rates in Oz at the moment would only fuel inflation. For whatever reason, inflation is more of a worry at the moment as opposed to the credit crunch. Apart from Rams problems in August and September, the credit problems have produced a rise in interest rates but not a spike in defaults.
Partly, I think, due to the generally stricter lending criteria and also due to the mortgage lending is still dominated by deposit taking banks, building societies and credit unions.
cut cut cut! consequences be damned!