Nervous markets take heart from big Australia rate cut
Guarded optimism mounted on Tuesday for a unified international response to the credit crisis ricocheting around the world after Australia cut interest rates far more steeply than expected.
The focus shifted to how other central banks, from Japan to Europe, for their answers to a call from U.S. officials for a “forceful and coordinated” global reaction to kickstart anemic bank lending.
Despair that such a solution had not yet been found weighed on some markets. Investors soured in particular on South Korea’s ability to weather the storm.
But equities across Asia rallied after the Australian central bank cut its benchmark cash rate by 100 basis points, the first move of that magnitude since December 1994. The MSCI Asia ex-Japan stock index gained 0.6 percent.
“If the need is there to get rates down toward something that’s more neutral, then why dilly dally? Get it done in one go,” said Brian Redican, an economist at Macquarie (fast cash loans). “It’s a flexibility other central banks should take careful note of.”
The furious sell-off in global equities in recent weeks and the deepening freeze in credit markets has made this week’s Group of Seven rich nations’ meeting in Washington even more important.
“The key issue is coordination of policies, since individual country policies aimed at shoring up confidence of domestic institutions can actually exacerbate systemic risk by altering relative risk between countries,” said Ashley Davies, a currency strategist with UBS in Singapore.
Speculation is swirling that China, with U.S. bonds making up the lion’s share of its $1.81 trillion in foreign exchange reserves, the world’s biggest stockpile, could have a key role to play in any global response.
Filed under: technology by Specialist