OREANDA-NEWS. October 09, 2008. Six central banks reduced interest rates, basing on the collectively adopted decision. The USA Federal Reserves system and European Central Bank reduced the basic rate for 0,5 percentage points respectively up to 1.5% and 3.75%; also the Bank of England, Sweden Riskbank, the central banks of Canada and Switzerland have reduced the basic rates, reported the press-centre of Latvijas Krajbanka. 

The Japanese central bank supported this mutual action, but did not alter the basic rate to yen, because it is on very low level – 0,5%. Apart from European and American central banks, also Chinese central bank has reduced interest rates already for the second time during last two weeks.

Such unprecedented mutual activity of central banks is driven towards liquidity provision on the financial markets. The financial aggravation creates big recession risk in the world’s economy, thus indicating on near inflation decrease de to consumer fall.

Together with collapse of prices to energy resources it allows the central banks to diminish interest rates, even despite of high inflation levels in the courtiers. Nevertheless the main question is, whether such bank action will provide the anticipated result, e.g. will it promote weakening of financial crisis and increase of economic activity.

Unfortunately the answer is no, at least is a short-term the decrease of basic rates can provide only small psychological effect to market participants. We cannot be sure that the decrease of basic rates by FRS and ECB will promote essential reduction of interbank rates. 

The burst ob bank crisis and lack of liquidity in the financial sector contribute to the increase of euro and the USA dollar rates. Since mid September the 3 month EURIBOR has grown from 4.96% to 5.39%, which is the highest level during the last 8 years. Despite the FRS efforts to stabilize situation in the USA bank sector, since mid September the 3 month USD LIBOR grew by 1.7 percentage points, reaching 4.52%, which is a record high level this year. 

No doubts that the main reason of rate increases are the events in the banking sector. In such circumstance the banks asks high price for high risk or do not want to lend the resources at all, in the result of which the interest rates continue to increase. There is no doubt, that the central banks` milliard euro and USA dollar worth inflows soften the crisis situation, but still the instant effect of Wednesday’s rate decrease is very tiny.  In the existing situation this monetary policy tool can be inefficient, because the price increase to credit recourses is based on mutual mistrust in the financial sector.