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Global Banks Chop Interest Rates as Crisis Grows

BY Admin  December 4, 2008 at 12:30 PM EDT

New ZealandReserve Bank Gov. Alan Bollard; AP

The Bank of England cut rates by a percentage point to 2 percent and the European Central Bank by three-quarters of a point to 2.5 percent, the biggest cut in the euro zone central bank’s existence.

Sweden’s central bank chopped its key interest rate by a record 1.75 percentage points to 2 percent to prevent the economy sliding further into recession.

The Riksbank said it expected rates to remain at that level over the coming year. There was an “unexpectedly rapid and clear deterioration in economic activity since October,” it said.

The Reserve Bank of New Zealand sliced interest rates by a record 1.5 percentage points to a five-year low of 5 percent and said it would probably have to cut rates again.

Indonesia also made a surprise cut in its key interest rate, by a quarter of a point to 9.25 percent, the first cut since December 2007 as the government sought to protect the economy.

“With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since World War Two appears to be on track,” JPMorgan economists said in a research note.

Last week, China slashed interest rates to spur an economy now threatened by a crisis that began with U.S. mortgage defaults last year. Australia and Thailand followed this week to avoid recession.

As interest rates approach zero, central banks are considering other options to revive their economies.

A senior Federal Reserve official said on Wednesday purchases of government debt might help tackle deflation, echoing remarks from Fed Chairman Ben Bernanke.

“You also do it to stimulate the economy when further reductions in interest rates are infeasible,” Richmond Federal Reserve President Jeffrey Lacker said, according to Reuters.

While actions taken by central banks and governments help the economy, investors remain nervous that major economies already in recession are deteriorating rapidly.

Such concerns have pushed oil, which is sensitive to global growth, below $46 a barrel to its lowest in nearly four years.

In the U.S., many top retailers reported lower November sales at established stores as a rush of bargain seekers at the start of the holiday shopping season were unable to save the month.

Key exceptions included Wal-Mart Stores Inc, which beat Wall Street expectations and reported record sales of grocery items near the Thanksgiving holiday as it drew in more consumers looking for low prices.

Several clothing retailers, including Gap Inc. and Hot Topic, also performed better than analysts had forecast.

November is expected to show the second consecutive monthly decline in retail sales as consumers facing a recession, job losses and tight credit cut spending on all but the most essential items.

A shift in the calendar that cut a week of post-Thanksgiving holiday shopping from November results also cut into sales.

Aggressive discounts and deals helped lure consumers into stores on Black Friday, the day after Thanksgiving that kicks off the key holiday shopping season, but that was the lone bright spot for most retailers.

Sales on Black Friday, which fell on Nov. 28 this year, were a little better than expected, said Ken Perkins, president of research firm Retail Metrics.

“It caused the early (November) results to just simply be miserable instead of terrible,” he said.

Of 24 retailers that have reported November sales so far, half missed estimates, while 11 beat them, according to Thomson Reuters data. Clothing retailer Gap was one of the biggest surprises, with same-store sales down less than expected at 10 percent.

Women’s clothing companies have been some of the worst performers during the downturn, and November showed more of the same for many of them. Limited Brands Inc posted a 12 percent decline in same-store sales.

Also, new claims for jobless benefits fell unexpectedly last week but the number of people continuing to receive government aid reached a 26-year high and large companies announced more job
cuts.

Initial claims for unemployment insurance dropped to a seasonally adjusted 509,000, from an upwardly revised figure of 530,000 for the previous week. That was significantly below analysts’ estimates of 537,000, according to a survey by Thomson Reuters.

Despite the improved figure, large companies continue to lay off workers. AT&T Inc. said Thursday it is cutting 12,000 jobs, or about 4 percent of its work force, because of the economic downturn. The Dallas-based telecommunications company said the job cuts will take place this month and throughout 2009.

DuPont said it will cut 2,500 jobs, mostly serving the U.S. and European automotive and construction markets, due to lower demand from the steep global decline in homebuilding, auto sales and consumer spending. The Wilmington, Del.-based chemicals maker also will trim 4,000 contractors by the end of this year, with additional reductions expected in 2009.