Co-ordinated rate cut by central banks does little to relieve market pressure

ECB AND US FED DECISIONS:A CO-ORDINATED half-point interest rate cut by the US Federal Reserve, the European Central Bank (ECB) and five other central banks did little to relieve pressure in money markets yesterday as borrowing rates remained resolutely high on commercial paper and on unsecured lending between banks.

While the Dow Jones index returned to positive territory during afternoon trading in New York, it slide 1.2 per cent earlier in the day as investors took account of the worsening outlook for the global economy.

The latest cut by the Fed brings the federal funds rate to 1.5 per cent. The Fed had decreased its target rate to 2 per cent last April as part of a series of decreases since August 2007, when the rate stood at 3.25 per cent.

Similar cuts were introduced by the ECB, Bank of England and the central banks of Canada, Switzerland, Sweden and the United Arab Emirates.

"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 Fed said in a statement that mirrored remarks by other central banks.

"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."

The move followed a radical decision by Fed chairman Ben Bernanke to buy an unspecified amount of commercial paper from companies and the decision to pay interest for the first time on the cash reserves banks hold with the Fed.

However, the markets were muted in their response.

"I don't think it's a panacea. There is an awful lot being thrown at the market to try to help by the Fed," said Robert Mellman, senior economist with JP Morgan in New York.

"I think the market's somewhat confused about what to make of it, whether it really will work or not, all these efforts . . . I think you have the authorities doing a lot to try to loosen up the system but you have a lot of forced selling by leveraged players, including hedge funds. You have a bit of a tug-of-war here."

Stocks at first rallied after the cut, but then turned lower. Some analysts said the central banks should have lowered rates by more, and predicted further reductions. Economists at Goldman Sachs and Morgan Stanley now project another half-point move by the Fed at its next scheduled meeting at the end of the month.

While the US authorities have taken a series of concerted measures to unfreeze the logjam in money markets, credit markets remained in disarray after the rate cut. Overnight corporate borrowing rates rose sharply yesterday and treasury bill yields fell.

At a press conference in Washington yesterday, US treasury secretary Hank Paulson said federal regulators were prepared to do more if necessary to stem the financial crisis.