Archive for October 8th, 2008

Denmark Central Bank raises rates amidst global rate cuts

October 8, 2008

Amidst global rate cuts, there is one Central bank that has raised rates- Denmark Central Bank. In its press release it says:

Since mid-September there has been an increase in ECB’s marginal rate. This has reduced the spread between Danmarks Nationalbank’s lending rate and ECB’s marginal rate. Recently the interest-rate spread has been negative, which has led to an outflow of  foreign exchange.

Danmarks Nationalbank has intervened in the foreign-exchange market to support the krone. The intervention has now reached a point which leads to Danmarks Nationalbank’s increase of the lending rate. The size of the change in the interest rate reflects the need to establish a positive interest-rate spread.

So, because of higher interest rates in Euroarea, it was leading to capital outflows from Denmark.

However, ECB just lowered its rates . So, in a way Denmark didn’t need to do anything. It just acted before the ECB announcement and could end up making a mess.Is there any coordination between European authorities?  And this is happening after the promise by EU countries that they are united.

And what is also not understood fully is that Denmark announcement has come when its financial system has collapsed as well. Danish government has promised to guaarantee all bank deposits as confidence in their banks has evaporated. So why raise rates?

It is getting really complex.

Update:

As I finised this post, I received an update from Denmark Central Bank which says as of now interest rates are maintained. I have a feeling it would have to reverse its stance prtty soon.

Hearing on Lehman and AIG woes

October 8, 2008

I have posted on Lehman (see this as well) and AIG collapse.

US Senate Committee on Oversight and Government Reform scheduled a hearing on AIG and Lehman woes. I have heard Lehman CEO Fuld’s testimony is worth reading.

There is a superb discussion

Central banks coordinate and announce a joint rate cut by 50 bps

October 8, 2008

In a shocking but largely expected move advanced economies Central banks have announced a coordinated rate cut.

Fed- 50 bps to 1.50%.
Bank of England- 50 bps to 5% (it had its mon policy meeting tomorrow)
Swiss Central bank – 50 bps to 2.5%
Canada – by 50 bps to 2.5%
ECB – 50 bps to 3.75%
Sweden – by 50 bps to 4.25% 

The Joint Statement by Central Banks said:

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

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. 

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Worrisome times.

Assorted Links

October 8, 2008

1. Krugman says Third World America?

2. WSJ Blog points US Households credit drops for the first time since 1998. It also has an update on the recession

3. Macroblog on the Fed move to pay interest on reserves

4. Mankiw points to good reads

5. Rodrik discusses the recent Krugman paper

6. Econbrowser has a superb post on Fed’s balance sheet


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