Major Global Central Banks act in tandem

Desperate times call for desperate measures. And so, major central banks banded together, and came out all guns blazing, as the battle to save the world economy escalated to a whole new level. The US Federal Reserve, European Central Bank and several other central banks—from Britain to China—announced rate cuts within seconds of one another. Fed officials said Wednesday’s action was the first time ever that it had coordinated a reduction in interest rates with other central banks. The closest thing to a precedent came in November 2001, shortly after 9/11, when the Fed and ECB announced rate cuts on the same day. But those actions were nominally independent, and did not involve any other central banks. That wasn’t the only unprecedented action in the day. Finance minister P Chidambaram briefly walked out of a cabinet meeting in the evening in order to soothe frayed nerves. He declared that the economy’s fundamentals were sound and that market fluctuations in India were purely sentiment-driven. He also said that the government would ensure that adequate liquidity was provided to the system—a statement which could be significant in light of the market buzz that a further cut in cash reserve ratio may be coming soon. One argument against a fresh CRR cut could be the need to combat inflation since such a cut pumps money into the system. But one of the reasons cited by the Fed for its rate cut was that inflationary pressure has eased, since commodity and metal prices have plunged (oil’s been easing off, too). That argument might be of great interest to India’s monetary managers.European markets pared their heavy losses after the announcement of the coordinated joint rates, only to fall again. On Wall Street, the Dow lurched from a 200-point drop at the open to a 200-point increase just 45 minutes later. The next few days will show if the measures taken by monetary authorities around the world are adequate or not.The coordinated effort followed a plunge in stockmarkets around the world earlier in the day. In Tokyo, the Nikkei plunged 9.4%, shedding nearly a tenth of its value in its worst single-day loss in two decades. In Hong Kong, the Hang Seng tumbled 8.2%. In Indonesia, the authorities simply shut down the stock exchange by late morning after it had tumbled 10.4%. As if that wasn’t enough gloom for the day, the International Monetary Fund slashed growth projections for the world economy, saying “it is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s”. IMF also cut its forecast for India’s GDP growth in in 2008-09 to 7.9% from 8% and for 2009-10 from 8% to 6.9%. Even as analysts were speaking darkly of just how bad the forthcoming recession could be, the central banks hit back with a vengeance. The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5%.