JOINT STATEMENT BY CENTRAL BANKS
Throughout the current financial crisis, central banks have engaged in continuous close consultation and have co-operated 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 an 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.
US FEDERAL RESERVE STATEMENT
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1.5%. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.
Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.
The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
BANK OF ENGLAND'S MONETARY POLICY COMMITTEE STATEMENT
In the United Kingdom, CPI inflation rose to 4.7% in August, reflecting increases in food and energy prices. Inflation is likely to rise further to above 5% in the next month or two, in large part as the full effects of already announced increases in the price of domestic energy are felt. But inflation should then drop back, as the contribution from retail energy prices wanes and the margin of spare capacity in the economy increases. Pay growth has so far remained subdued and commodity price pressures have eased, with oil prices down substantially from their mid-summer peak.
Conditions in international credit and money markets have deteriorated very markedly. Many markets are closed. In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets. The Committee noted that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required. The Committee therefore welcomed this morning's announcement of a Government programme to recapitalise the major UK banks.
Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially, reflecting a sharp monetary contraction. Output growth slowed to a halt in the second quarter, business surveys point to further weakening during the second half of this year, and the labour market has softened. Consumer spending growth has slowed, in part as a result of the squeeze on real incomes, while business and dwellings investment have declined. Equity prices have fallen, and the further tightening in credit conditions will also weigh on domestic demand growth. The depreciation in sterling over the past year should support net exports, but the prospects for demand growth in the UK's main export markets have worsened. The weakness in output growth at home will open up a growing margin of spare capacity that will over time bear down on inflation.
The Committee remains focussed on setting Bank Rate in order to meet the 2% inflation target. In doing so it continues to balance two risks. On the downside, there is a risk that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulls inflation materially below the target. On the upside, there is a risk that above-target inflation this year and next raises inflation expectations so that inflation persists above the target for a sustained period. During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside. In the light of that outlook, the Committee judged at its October meeting that an immediate reduction in Bank Rate of 0.5 percentage points to 4.5% was necessary to meet the 2% target for CPI inflation in the medium term.
EUROPEAN CENTRAL BANK STATEMENT
The minimum bid rate on the main refinancing operations of the Eurosystem will be reduced by 50 basis points to 3.75%.
In the euro area, upside inflationary risks have recently decreased further. It remains imperative to avoid broad-based second-round effects in price and wage-setting. Keeping inflation expectations firmly anchored in line with our objective and securing price stability in the medium term will support sustainable growth and employment and contribute to financial stability.