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Fed set to halve rates; Japan, China may act too

(Agencies)
Updated: 2008-12-16 15:09

New York/Singapore - The US Federal Reserve looks set to halve interest rates close to zero on Tuesday and China signalled it may cut its rates again in a global drive to contain the worst financial crisis in 80 years.

The Federal Reserve Building in Washington while the Fed is inside meeting, October 29, 2008. The Fed is expected to lower the prime rate today after two-days of meetings.[Agencies]

Central bankers return to centre stage in an action packed week that started on a sour note with a rescue plan for US carmakers stuck in limbo, reverberations of an alleged multibillion financial fraud and a collapse in Japanese business sentiment.

Still to come is the possibility that the Bush administration could approve a bailout for the automakers as early as Wednesday, results from Goldman Sachs, which may report on Tuesday its first quarterly loss as a publicly traded company, and a Bank of Japan policy meeting.

The Federal Reserve is expected to cut its benchmark rate to 0.5 percent, its lowest in more than half a century, and to promise to dip into its toolbox for less conventional tools to pull the world's biggest economy out of recession.

Japan's financial strains

In Japan, where rates are already at an ultra-low 0.3 percent and the economy is possibly poised for its longest ever slump, the finance minister urged the central bank to also take unorthodox steps to ease a funding crunch faced by Japanese companies.

Bank of Japan holds its policy meeting on Thursday and Friday and there is some market speculation it may cut interest rates after it reported the biggest crash in business sentiment in three decades.

But the Nikkei newspaper said many within the central bank were reluctant to drive rates any lower and wanted to wait for the effects of the last cut in October, of just 0.2 percentage point, to work their way through the economy.

Japanese media reported that the central bank is considering buying commercial paper directly from companies to ease their financing strains.

China's central banker sees rate-cut pressure

Zhou Xiaochuan

China's Central bank governor Zhou Xiaochuan also left the door open to more easing after China slashed its rates by more than a full percentage point last month, saying it would depend on inflation in the months ahead.

Zhou said on Tuesday that slowing inflation in China gave the bank room to lower borrowing costs. "Consumer prices are going down, and sometimes even faster than we think," he said.

Zhou said he sees pressure to cut interest rates from now until the beginning of next year as growth slows amid a drop in exports.

The global financial crisis has caused the world's fourth- largest economy to cool, "especially Chinese exports to other part of the world," Zhou said in Hong Kong, where he is attending a regional meeting of the Financial Stability Forum. "From now until the beginning of next year is full of interest-rate cut pressure."

The severity of the global downturn set off by a US sub-prime mortgage market meltdown last year surprised policymakers, who have been running out of options after slashing rates to historic lows and rushing out massive stimulus plans.

Among the world's top economies only China has avoided recession, but it risks a sharp slowdown that may feel like one, and the authorities in Beijing are scrambling to engineer a soft landing with a mix of massive government spending and interest rate cuts.

Economists now expect the US Federal Reserve to acknowledge it will have to resort to direct purchases of government and mortgage-related debt and possibly massive money injections of the sort Japan used in the 1990s to revive its deflation-ridden economy.

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