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Blimey, That's a Rate Cut, Innit?
The Bank of England has stunned the markets by slashing its benchmark rate a full point and a half, to 3 percent, its lowest level since 1955.
"It's absolutely staggering and deeply impressive," Brian Hilliard, director of economic research at Société Générale in London, told Bloomberg News. "They are clearly grasping the nettle and taking deep action. Boy, this is going to have an impact."
Other European banks followed, but not as deeply. The European Central Bank cut its benchmark rate by a half point, to 3.25 percent, its lowest since October 2006. The Swiss central cut its rate by a half point.
The problem for central banks in trying to ease the financial crisis with rate reductions is that deep cuts carry with them a whiff of panic, possibly unnerving the very markets they are trying to steady.
But the British central bank, independent only since 1997, saw a significant deterioration and felt compelled to act boldly.
"Since mid-September, the global banking system has experienced its most serious disruption for almost a century," the bank said in its statement . "While the measures taken on bank capital, funding, and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply."
The rate cuts follow a wave of cuts earlier this month led by the Federal Reserve, which cut its benchmark by a half point, to 1 percent.
The quandary for the banks now is how low rates can go before they are at zero and the tools available to stimulate their economies become limited. All are aware of the experience of Japan, which has had near-zero interest rates for more than a decade.
As Edward Hadas says on Breakingviews.com: "These cuts are impressive, but aren't likely to do much. When borrowers and banks both want to get their leverage down, even negative real rates aren't particularly alluring. That, at least, was the experience in Japan for more than a decade. The U.S. is learning a similar lesson."


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