Ball Drop in Rates between Central Banks
It was one which will the largest decline. The winner is the Riksbank, the Swedish central bank, which has the highest rate cuts made by a Western central bank during the current crisis. Indeed, it has reduced its key rate, the Repo, by 175 basis points, thereby establishing the 2%. Although officials of the Riksbank suggested that the rate should remain unchanged during the next year, many economists, including Alexis Garatti Natixis, Repo predict a 1% end 2009.
This week, most Western central banks have put their hands in the dough to bring their respective economies of the crisis. It is not certain that lower rates are sufficient in themselves to allow an exit from crisis, but they are nevertheless inevitable.
The Australian central bank has opened the way Tuesday followed Thursday by the Bank of England and European Central Bank. The traders were awaiting the decisions taken in Frankfurt and London. The anxiety was also palpable at the beginning of the week on the foreign exchange market. Traders have not been disappointed because their forecasts proved perfectly correct. Indeed, the ECB has allowed a decrease of 0.75 percentage point from its key rate, the highest decrease of the institute since its inception in 1999. On the other side of the Channel, the Bank of England has continued its aggressive monetary policy by lowering its rate of 1%.
However, disappointment was quickly read on the faces. Indeed, investors were expecting a decline even more aggressive by the Bank of England, which could decrease any advantage to the pound sterling. Even with rates at their lowest since 1951, the pound sterling fails to rise, recording a decline of nearly 35% over the year against the yen. Its yield fell to its lowest level since 1939, making the pound sterling currency most affected by the financial crisis.
On the euro, indeed the audacity of Jean Claude Trichet was hailed by leaders of the euro area, but the markets have reacted rather coolly to the comments following the governor of the ECB. Indeed, highlighting the risk of contraction of GDP in the euro zone in 2009, Jean Claude Trichet has frightened investors which was a godsend to the dollar.
Despite a continued deterioration of the labor market and growing concerns about how to put an end to the bizarre episode around the “Big Three” of Detroit, the dollar still enjoys plenty of its safe haven status which does not seem to deny at this time.
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