Global interest rate easing may be near end

  • Business
  • Saturday, 12 Jul 2003

FRANKFURT: The cost of money has fallen further around the world this week with the Bank of England and a trio of Asian central banks trimming interest rates to jump start a hesitant global economic recovery. 

The European Central Bank (ECB), however, bucked the trend and, as expected, held official rates steady at record lows of 2%, a level that ECB president Wim Duisenberg expects them to remain at for a considerable time. 

South Korea, Asia’s fourth largest economy which has tumbled into recession, and Singapore, where growth has shrunk sharply, also lowered borrowing costs, although they signalled the worst may be over. Indonesia followed suit with a cut. 

This latest batch of monetary easing has led economists to predict that 2-1/2 years of central bank rate slashing in the light of collapsing stock markets, corporate scandals and war is nearly over. In major industrial countries, rates are down to over four-decade lows. 

“There is considerable risk that we are at or close to the bottom of the interest rate cycle,” said Norman Williams, an economist at Barclays Capital in London. 

The Bank of England’s quarter percentage point cut to 3.5% on Thursday surprised markets, which had expected its new governor Mervyn King to bide his time a month or two before putting his stamp on monetary policy. 

But consumer spending and retail sales in Britain are sagging as the steam seeps out of a red-hot housing market, manufacturing starts contracting again and a recent rise in the pound sterling threatens to crimp British exports. 

Most economists in a Reuters survey taken after the British decision believe rates have hit bottom, with 21 of the 35 polled saying the next move would be up, probably in 2004. 

In the United States, most primary dealers last month also said the Federal Reserve had finished cutting interest rates after a modest quarter point reduction to 1% on June 25. 

But the US labour market remains under pressure. Unemployment claims have risen to levels that usually mean the nine-year high in the jobless rate of 6.4% will climb still further. 

In the euro zone the picture is even muddier. 

Business and consumer surveys are sending mixed signals, which Duisenberg has taken as a signal that confidence has reached bottom. Yet there is no sign a turnaround is taking firm hold. 

Industrial output shrank again in May in Germany, the 12-nation euro zone's largest economy which already is effectively in recession. The Netherlands is contracting, Belgium is wobbling and prospects for Italy and France are uncertain. 

Euro strength is hurting export power and analysts said if the currency climbed back toward 1.20 against the US dollar in the next few months, that would trigger more ECB cuts. 

In Asia, South Korea cut its main interest rate a quarter point to 3.75% on Thursday in reaction to its first recession since a 1997/98 financial crisis, and the Monetary Authority of Singapore lowered the mid-rate of its target range for the Singapore dollar. 

Indonesia joined in the easing, cutting a key interest rate for the sixth time since May in response to falling inflation and a stable currency. Hong Kong, the Philippines, Thailand and Taiwan have already cut rates in the wake of the US Fed cut. – Reuters  

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