Central banks take big knife to lending rates

We should be feeling lucky now that the ECB and central banks around Europe have made lending its cheapest since the second world war, but it is no favour. It is an attempt to get us spending again and get the credit train running once more.

Sweden set the ball rolling with a huge 175 point cut, followed by one and a half percent in New Zealand, and another percent in Britain.

Many analysts are saying it is too little too late and another cut will come in the new year, but ECB boss Jean Claude Trichet is not saying anything definitive on that score. The markets may decide it for him anyway.

“The European Central Bank has taken a wise decision. 50 basis points would have been too low, 100 points would have been too much so I would say, exactly the right decision to get rid of the bad deflationary tendencies we all face every day,” says one trader.

The measures are also about bolstering Christmas, when many businesses make the lion’s share of their sales. If sales are flat, expect a rough new year.

“The cuts of the bank makes in the policy rate need to be reflected in lower rates across the economy, to consumers through mortgages, and to businesses through businesses loan rates,” is the view of a CBI member.

And there’s the rub. Until now the banks have pocketed all that government cash to improve their balance sheets, but have not been lending it to us. Only that can support spending, and perhaps prevent a sharp rise in unemployment.

Copyright © 2009 euronews

tags: ECB, New Zealand