Busch: Europe Provides "Shocks"  On Interest Rates

Today, we've had three European central banks move on their overnight interest rates in an attempt to quell their economies slide into recession. The biggest shocker was the Bank of England aggressively cut interest rates 150 basis points from 4.50% to 3.0%.

Polled analysts/economists had only predicted a cut between 50 or 75 basis points. Since this central bank gained independence in 1997, they had never cut rates by more than 50 basis points. Clearly, today's move was based on a rapidly deteriorating economy that has been accelerating to the downside since the global credit crunch began in mid September. BOE Governor King may see his CB on a path to do something they have never done in its 500 year existence: take rates to 2.0%.

In another shocker today, the Swiss National Bank cut interest rates 50 basis points to take its reference range down to 1.50%-2.50%. The SNB now offers three month repos at 0.60%. The SNB was not expected to move until December. In their explanation for why they moved they state that the global economic outlook has deteriorated more severely than anticipated and that 2009 Swiss growth could be negative. Fascinatingly, the SNB specifically mention the recent strength of the Swiss franc as a positive due to the subsequent downward influence on inflation. Clearly, they like the stronger currency.

Lastly, we had the European Central Bank cut interest rates by 50 basis points from 3.75% to 3.25%. They reduced their marginal lending rate to 3.75% from 3.25% and their deposit rate to 2.75% from 3.25%. Like the UK and Switzerland, the Eurozone is experiencing shockwaves from the credit nuclear explosion that occurred from mid-September to the end of October. However unlike the other two central banks, the ECB acted exactly how the market was expecting them to move. Remember, these are the same smart guys that RAISED RATES in the summer. Therefore, it's not that surprising now that they are slow to react to cutting rates. ECB head Trichet did say they discussed a 75 point rate cut today, but only cut 50 as they await additional staff information next month.

These actions by the three central banks appear to be in concert which addresses the major drawback to Europe: lack of coordination on policy. Now monetary policy is one aspect, fiscal policy is another. This is where the US has a decided edge in dealing with the credit nuclear explosion. They have strong cooperation and interaction from the US Treasury, the Federal Reserve, and Congress to develop and use tools necessary to ease the dearth of credit that has overtaken the economy. So far, their current actions/programs have begun to work and may heal the radiation burns inflicted on our credit driven economy.

They may extend beyond our borders to the rest of the world. But this is the point: the rest of the world is not acting in this same cooperative/coordinated fashion. Therefore, they may not reap the same benefits as the US on the economic recovery in the same time frame. I hate to be the one to break it to the French, but if they are expecting the November 15th G20 meeting to solve their problems, they are likely to be disappointed by a lame duck US president and a president-elect who hasn't yet named his economic team.

My suggestion for the Obama-Biden Transition team of John Podesta, Valerie Jarrett, and Pete Rouse: get moving as fast as you can to get the economic team together. The economy isn't waiting and neither should you.



Andrew Busch

Andrew B. Busch here