Interest rates look set to fall as the world's finance ministers and central bankers banded together yesterday in a bid to head off financial chaos in the wake of the devastating attacks on New York and Washington.
But there is growing unanimity that a short-term recession is unavoidable. Central banks across the world pumped more than $80 billion (€87.48 billion) into the system in a bid to ensure order in world markets.
Finance ministers from both the G7 and Europe vowed to provide all support which might be needed and to take all necessary measures to ensure the proper functioning of the markets and the stability of the financial system. Earlier, the Economic and Financial Committee, made up of top finance officials and civil servants from around Europe, met in Brussels to debate the likely impact on the European economy.
The central banks have so far stopped short of cutting interest rates. The ECB governing council meets today, but is not expected to move in advance of the US Federal Reserve. The Fed chairman, Mr Alan Greenspan, was flying home from Basle in Switzerland yesterday after being turned back on Tuesday. US Treasury Secretary Mr Paul O'Neill had also been stuck in Tokyo.
The central bankers and finance ministers said they stand ready "to provide, in close cooperation with the United States, all support which might be needed", raising expectation that interest rate cuts are on the cards. The statement from the European authorities added that "all necessary measures will be taken to ensure the proper functioning of markets and the stability of the financial system".
"This demonstrates that we are alert, and that we are answering very short-term panicky reactions in I believe an adequate way," ECB president Mr Wim Duisenberg told the European Parliament, where he was giving his quarterly testimony. The fear now is that a short-term recession cannot be avoided in the US. This will lead to lower interest rates than would otherwise have been the case.
At the same time, the impact of the US downturn on Europe is likely to be larger than many in the ECB and elsewhere would have hoped earlier in the year.
Mr Duisenberg also warned that the turmoil in markets from the terror attacks could have long-term financial consequences, but it was premature to make any firm judgements on the impact.
"It is true that there may be long-term consequences from this one-off external shock (the US attacks) that has been dealt to the financial system," he said. Prices in most markets were very volatile yesterday, with most investors reluctant to trade in advance of the US reopening.
The dollar rebounded, almost halving its losses of the previous 24 hours, supported by the $80 billion of extra funds supplied by the European Central Bank, the Swiss National Bank and the Bank of Japan.
One of the worries was that the twin towers of the World Trade Centre housed offices of many banks and financial institutions. Officials said they were worried that problems could occur with banks whose offices had been located in the towers, as they might not be able to issue their payment orders right away.
Oil prices, which had jumped on fears of Middle Eastern conflict, fell after the OPEC producers' cartel gave reassurances about world supplies. However, with many in mourning and US markets closed for the second day running, confusion over the impact of events on global economic growth and markets was high.
But whatever the retaliation, the attacks threaten to have a major impact on consumer confidence and could help send the world economy sliding towards recession.
