Rate cuts steady Asian markets

October 9, 2008
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, HONG KONG, October 9 – Central banks in Asia followed in the steps of the United States and Europe Thursday, cutting key interest rates in a bid to bring calm to panicked global markets and limiting massive losses.

Japan injected a further 40 billion dollars into the money markets, while Hong Kong slashed its key rate by a half percentage point, matching cuts by the US and European central banks on Wednesday.

Taiwan and South Korea also shaved 25 basis points off their key rates.

The crisis measures prompted an initial market rebound, with the Tokyo Stock Exchange\’s benchmark Nikkei-225 index rising into positive territory for the first time in a week before closing down 0.5 percent.

Panic selling on Wednesday sent Tokyo to a 9.38 percent drop — its worst day since the October 1987 stock market crash.

Hong Kong\’s Hang Seng Index rose 2.65 percent in afternoon trade, recovering some of its recent losses as bargain-hunters took advantage of a market down 15 percent on the week.

Australian shares, however, closed down 1.5 percent and there were warnings of more bad news ahead, with the world in the grip of the worst financial crisis since the Great Depression.

US Treasury Secretary Henry Paulson warned more financial institutions were expected to go under in the United States, while the International Monetary Fund warned of a "major downturn" for the global economy.

Wall Street on Wednesday dropped 2.01 percent after a highly volatile session. The Dow Jones Industrial Average has now shed 14.7 percent over the past six trading days.

On Wednesday the US Federal Reserve, the European Central Bank, Bank of England and central banks in Sweden and Switzerland all cut their interest rates Wednesday by half a percentage point.

China joined in, too, cutting 27 basis points off its key rate.

In a statement, the central banks said they were locking arms in "unprecedented joint actions, such as the provision of liquidity, to reduce strains in financial markets".

"It was a very good way to underline the concerns and the shared concerns," Bank of America analyst Peter Kretzmer told AFP in New York. "In that way, it helps."

The rate cuts — and a separate move by Britain to pump 87 billion dollars into its major retail banks — were meant to restore some confidence after a wave of spectacular bank failures in Europe and the United States.

Despite a staggering 700-billion-dollar US bank bailout that cleared Congress last Friday, Treasury Secretary Paulson warned that more financial institutions should be expected to go under.

"One thing we must recognise — even with the new Treasury authorities, some financial institutions will fail," he said, adding that the financial chaos had "seriously impacted" the economy.

Political leaders welcomed the interest rate cuts.

"It is important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," said White House spokesman Tony Fratto.

German Chancellor Angela Merkel said it would "help build confidence," while French President Nicolas Sarkozy — whose nation currently holds the rotating EU presidency — called it a "very important decision."

But the rate cut and Britain\’s costly initiative initially failed to halt panic selling, with London plunging 5.38 percent on Wednesday.

Dealers said investors were unconvinced that the rate cuts would stop the rot.

Speaking on French television, European Central Bank chief Jean-Claude Trichet said "excessive pessimism is ill-advised".

"We all together call upon the market participants who are in this state of intense turbulence, we tell them to collect themselves," he said. "There are elements of confidence out there."

With the world\’s top economic policy makers headed to Washington for the annual meetings of the International Monetary Fund and World Bank on Monday, Trichet said: "It is very important that we coordinate as closely as possible".

In other initiatives, the Federal Reserve said it had authorized a new 3

7.8-billion-dollar cash infusion into troubled insurance group AIG, after most of the 85-billion-dollar lifeline that Washington provided last month was used.

Iceland\’s government took over the country\’s biggest bank, Kaupthing, after the country\’s two other biggest banks were nationalised.

Its central bank said on Wednesday it was giving up its efforts to shore up the krona currency. The Nordic island nation is so exposed to the credit crunch that officials say it risks bankruptcy.

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