Weekly Focus
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More history writing
Fri, Dec 5 2008, 15:29 GMT
by Danske Research Team
Central banks across Europe this week took historical steps to fight the economic crisis. The Swedish Riks-bank was the most aggressive, cutting 175bp, followed by the Bank of England, which slashed rates by 100bp (following a 150bp cut last month). The ECB was the last in line and settled for a cut of 75bp - as usual the ECB sticks out as the most conservative.
Central banks are responding to the very sharp dete-rioration in growth prospects over the past 2-3 months. Surveys and production data point to the most abrupt and deep downturn since at least the first oil crisis in the early 1970s. The downturn is the result of the financial crisis escalating in the autumn and the lingering impact of the rise in oil and food prices earlier this year.
Authorities around the world are now showing a strong determination to fight the downturn and take unprece-dented measures into use. Monetary policy smoothing (cutting gradually) has been abandoned - central banks are now front-loading rate cuts to prompt a bigger and faster effect. In the US, the Federal Reserve has em-barked on quantitative easing and will likely go to a Zero Interest Rate Policy (ZIRP) over the coming months. Fiscal stimulus packages are also being im-plemented globally, and another package is pending in the US - probably ready to be signed when Barack Obama enters office on 20 January. T
The combination of new radical monetary policy meas-ures and strong fiscal stimulus will help to stabilise the global economy. A further useful stimulus to the world's economy is the rapid decline in oil prices, which is providing a super boost to real incomes. This pro-vides some light at the end of the tunnel and should prevent a deflationary spiral in the global economy. We expect to see a gradual recovery in 2009, kicking off in the US (see Global Scenarios ).
Published on Fri, Dec 5 2008, 15:29 GMT
Archive
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