On top of efforts earlier in the week by the EU finance ministers additional efforts were taken to avert a worsening of the credit crunch. Central banks in Europe and the US cut interest rates, and the British government announced a £500 billion rescue package for banks.
As part of the measures taken by the government, Britain pledged £50 billion to buy shares in major banks, while also setting up £450 billion to shore up bank finances and guarantee depositor’s funds.
The Bank of England joined with other rate setting banks to cut interest rates earlier in the week, in one of the most coordinated actions along these lines ever taken. UK interest rates were cut by half a point to 4.5% in the Bank’s first emergency rate cut since the 9/11 attacks. The ECB, the US Federal Reserve, Canada, Sweden and Switzerland also made similar cuts. Earlier in the week, Australia cut its interest rate by a full point.
In the US the Federal Reserve cut its rate to 1.5% and the European Central Bank moved to 3.75%. The rates in England are now at their lowest point in two years. Some economists look for rates to drop even further.
In taking action, the central banks made a joint statement: “Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability.”
“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.”
In perhaps the largest backlash to result from the overall crisis, Iceland and Icelandic banks are seeing a major meltdown in the financial system. The country is looking for loans from abroad to help shore up its teetering situation. Finance ministers from the Group of Seven (G7) industrialized nations will meet later in the week in Washington to discuss ways to strengthen the international financial system.
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