Interest rates to fall in new global rescue

Published on Saturday 25 October 2008 15:19

GOVERNMENTS could be forced into further urgent, co-ordinated action as early as this week as the world economy threatens to go into meltdown, economists are warning.

Central banks, including the Bank of England, are coming under pressure to make a second round of interest rate cuts after markets took a severe hammering on Friday.

Investors plunged their money into the dollar and the Japanese yen, traditional safe havens in troubled times, causing currencies elsewhere, including Britain, to plummet.

There are also mounting concerns that a number of emerging economies could soon follow the West into crisis, a development which economists warn is almost certain to lead to worldwide recession. Until recently, solid growth in emerging countries such as China had been expected to balance out the financial turmoil in western markets. But United Nations general secretary Ban Ki-moon warned on Friday that emerging economies could be the "next shoe to drop". He called for "drastic" action among member states.

With the US government expected to admit the American economy has slowed for the first time on Thursday, analysts say it is increasingly likely that a repeat of last month's surprise interest rate cuts in Europe and the US could be delivered before the end of the week. They have also raised the possibility of central banks agreeing to sell dollars and yen and buy up weakened currencies, to stabilise foreign exchange markets.

The pound racked up its biggest fall against the dollar since 1992 on Friday, falling to a six-year low beneath $1.53. At the same time, the yen soared to its highest level in 13 years, while currencies in countries from Brazil to South Korea took dramatic nosedives.

Doug Roberts, chief investment strategist for Channel Capital Research in the US, said: "I wouldn't rule out the possibility of something on a co-ordinated basis globally."

The board of the International Monetary Fund is meeting this week to discuss emergency revisions to its loans programme as the list of countries seeking financial aid continues to grow.

The IMF has $200bn in loans available but its chief, Dominque Strauss-Kahn, has said he would be prepared to find further funds if necessary.

In the UK, the pressure on Bank of England governor Mervyn King to make a bold decision on interest rates is rising amid fears Britain is on the cusp of a deep and protracted recession.

Government figures on Friday showed the economy slowed for the first time in 16 years between July and September, and the next quarterly figures, to be published in January, are widely expected to show the UK has entered a technical recession. Economists suggest there could be at least four more quarters of negative growth to follow.