The coordinated rate cut: Cutting Issues in International Financial System?

If there was something that was very difficult to foresee was that the European Central Bank decided to make a cut in interest rates. If there was something more difficult to predict is that such a cut would be 50 basis points. And if you want something even more difficult, it was expected that the 50 basis point cut is made outside the preset meetings of the ECB to assess the evolution of prices in the eurozone and make decisions that are considered accordingly. Did you notice that, after all, there is not much difference between the developed and developing ones in terms of economic policy decisions in crisis situations? Developed economies have spent decades criticizing decisions made by developing countries in the midst of crisis. Today, the first world countries are taking the same measures without considering the consequences that may ensue in the future, although this seems not to care. The last days were undoubtedly filled with shocking news. Such was the flow of news that did not fully digest one that immediately appeared of a similar magnitude. Thus, while in Iceland bank established a yard (perhaps advised by an Argentine), in England it was decided the partial nationalization of private banks in a scheme estimated at 60,000 million euros.

Nationalization, bailouts, higher guarantees for bank deposits, the Fed's direct loans to businesses, etc, etc, anything goes when there is no clear solution to stop this crisis. In this context, it was imperative a measure that creates a big impact markets, which did not show a positive reaction to the approval of the U.S. mega plan or to the increase in the guaranteed amount of deposits in European banks. That is why the U.S. Federal Reserve, European Central Bank (ECB), Bank of England and the central banks of Switzerland, Canada and Sweden decided a coordinated cut its benchmark interest rates 50 points staples. They had also cut its interest rate, the central banks of China, Hong Kong and Australia. Japan's central bank decided to stay out of this joint venture (now its benchmark interest rate stands at 0.5%).

No doubt that the coordinated cut in interest rates is a fact unthinkable and unexpected. But beyond that, the next question inevitably arises: What effect might have on the international financial crisis the joint action of major central banks around the world? The first thing you can say is that this measure, together with others taken individually by the governments of major countries of the world, is a clear sign that there is full readiness to act and take necessary measures to curb this crisis. Certainly this is a sign not less that aims to bring confidence to the financial system. It is worth remembering that until just a couple of weeks, developed (with Europe in the lead), claimed that all the effort to stop this crisis, made the United States. Now the situation changed dramatically and governments of developed countries have decided to intervene as they had never before imagined, going against the principles they preached until recently. This can also be read as an implicit message that is based on the fact that the crisis has impacted on inflationary pressures strongly hitting commodity prices.

Surely the ECB never have dared to do something and if it had a high degree of confidence that inflationary pressures are giving ... The broad support of the measure is also a good sign for the markets. This gives them more power to governments to address the crisis. Even up economies like China have made cutting their interest rates. But beyond these positive aspects that can produce this coordinated action, it can also lead to unwanted effects ... The first relates to the issue of information asymmetry: investors, who do not handle all the information held by central bankers to see a decision of such magnitude may be invaded by fear at the thought that the crisis is over serious than they imagined ... Otherwise it would not be justified, they will think. While the reduction in interest rates will lower the funding of financial institutions, most likely will not help to generate private sector funding or even among financial institutions since the health concerns of these persists. On the other hand, the rate cut that does not correspond directly to the attenuation of inflationary pressures can lead to problems on the dynamics of prices if these cuts are not reversed as soon as the financial system problems are being resolved routed.

In short, rather than specific effects to counter the crisis, the coordinated rate cuts by major central banks, are a sign that does not allow the financial crisis run its course. I think it's a good sign, but must be complemented by prudent actions once the crisis mitigate its effects. Otherwise, you may be putting the seed of the next crisis. We will meet again tomorrow, Horacio Pozzo