OREANDA-NEWS. November 10, 2008. The world’s central banks are continuing to decrease interest rates. In the first half of October, basing on the collectively adopted decision, six central banks reduced interest rates, reported the press-centre of Latvijas Krajbanka.

Later the USA Federal Reserves system again decreased the USA dollar prime rate, which now comprises only 1%. On Thursday the Bank of England and European Banks informed about the next reduction of the prime rates.

The decision of the Bank of England to reduce the interest rate by 1.5 percentage points was unexpected. Now the prime rate for pound sterling comprises only 3%, which is the lowest level since 1955. The monetary policy committee indicated to very pessimistic economic development perspectives, and namely, its members foresee that the recession in the economy of Great Britain will be tough; the inflation will decline rapidly reaching very low level.

The European Central bank already for the second time is reducing the euro prime rate for 0,5 percentage pints, thus now interest rate comprises 3.25%. The financial crisis has already influenced the European economy: according to the information of Economic Committee, the European economy has already faced the recession phase, and the next year the GDP could increase only for 0.1%.

The situation in the global economy and in the financial sector is still very intense: the world is in the epicentre of the financial crisis. The world’s countries` governments and the central banks are inflowing resources into the banking sector and economy actively. The last activities are already reflecting in the decline of interbank rates. The 3 months EURIBOR rates have declined, reaching the level of March 2008, while the 3 month USD LIBOR reached the lowest point since November 2004.

Considering the pessimistic prognosis related to the world’s economic development in the nearest future most likely we can experience further aspiration of the central banks to soften the crisis situation. The biggest market part is waiting for the next decline of the prime rates by the FRS and ECB. 

No doubt that in a short-term such and action of CB can help the situation. Bus still, we cannot forget, that the USA dollar prime rate is already 1%, Trichet`s comments also allow to forecast low euro prime rate levels for the nearest future. Now the question remains – what will the central banks do later, when they will not be able to use the prime rate decline for the stimulation of economy. 

Anyway, the euro interest rate decline is beneficial for those Latvian borrowers, who acquired loans in euros. Although in most cases the interest rate decline reduces the monthly payments only for few tens of lats, it also means a lot in the situation of the economic decline.