Global Interest Rate Cuts ECB .50% BOE 1.5% Equals Deflation

By: Mike_Shedlock

The Bank of England cut rates by 1.5% in a larger than expected move, The Swiss National Bank by 50 basis points in an emergency action when it was not even meeting, and the European Central Bank cut rates as expected by 50 basis points earlier today.

Looking ahead, ECB president Trichet Says Can't Rule Out More Cuts as Growth Slows .

"The intensification and broadening of the financial turmoil is likely to dampen global and euro-area demand for a rather protracted period," Trichet said after reducing the bank's key lending rate to 3.25 percent, the second cut in less than a month. "Price, cost and wage pressures should also moderate. I don't exclude that we will decrease rates again." Trichet said the ECB's rate-setting Governing Council also discussed a 75-basis-point reduction.

Central banks around the world are paring borrowing costs as the financial turmoil curbs growth. The Bank of England today unexpectedly lowered its key rate by a third to 3 percent and the Swiss central bank followed with an emergency half-point cut. The euro region's economy is probably already in a recession and will stagnate in 2009, the European Commission said this week.

Manufacturing orders in Germany, Europe's largest economy, dropped by a record 8 percent in September, the government said today.

UK Rates Lowest Since 1955

Bloomberg is reporting BOE Leads European Central Banks in Rate Cuts as Economies Slow .

The Bank of England led European central banks in reducing borrowing costs to counter the worst financial crisis in almost a century, cutting its key rate by 1.5 percentage points to the lowest level since 1955.

The U.K. central bank reduced its key rate by the most since 1992, taking it to 3 percent. The European Central Bank lowered its benchmark by 50 basis points to 3.25 percent and Swiss policy makers cut their main lending rate by the same margin to 2 percent after an unscheduled meeting.

"It's absolutely staggering and deeply impressive," said Brian Hilliard, director of economic research at Societe Generale in London. "They are clearly grasping the nettle and taking deep action. Boy, this is going to have an impact."

No Impact

Brian Hilliard cannot possibly be more wrong. The impact from these central bank actions will will be close to zero. I would advise those who think these rate cuts will stimulate spending or lending to read and understand Something For Nothing vs. Paradox of Deleveraging .

Hilliard seems to believe the same Keynesian Claptrap that has afflicted the likes of Bernanke, Paulson, PIMCO, Krugman, and even Roubini. Of that group, only Roubini has called things well, even though he adheres to Keynesian silliness about how Central Banks should respond.

It was Keynesian foolishness that caused the housing bubble in the fisrt place. Keynesian foolishness cannot possibly be the solution.

Deflationary Impacts Of Peak Credit

The entire world is on the backside of Peak Credit .

Flashback June 30, 2008. Let's review Deflationary Hurricanes to Hit U.S. and U.K. Look at what others were saying.

Philip Shaw of Investec said: "Although we take the view that the economy will avoid a recession, our confidence is ebbing."

Tim Bond, the chief equity strategist at Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral.

Wage Price Spiral?

A wage price spiral? In the US? The Fed will hike 6 times? Good Lord. Anyone listening to Tim Bond or Barclays has had their head handed to them. We did not see 6 hikes we saw the Fed slash rates from 5.25% to 1%, the equivalent of 17 quarter point cuts.

This is what I said.

No Wage Price Spiral

Wage price spirals happen when corporations get into bidding wars over employees, not when they are shoving them out the door by the hundreds of thousands. Mr. Bond must be reporting from Bizarro World. The odds of a wage price spiral in the US are essentially zero as credit is drying up and overcapacity is everywhere you look. Massive Government and Private Sector Job Cuts Are Coming .

Deflation Has Set In

It is amusing that in the face of this carnage, many are still screaming inflation, stagflation, or even hyperinflation simply because food and energy prices are rising. Deflation is here and now in the US. Deflation is knocking on the door of the UK and Eurozone. And there is nothing that can be done about it.

The amazing thing is people continue to listen to Bernanke, Paulson, the administration, and a group of analysts and economists that have collectively gotten everything wrong, every step of the way.

The Race To Global ZIRP is clearly on. Almost everyone was looking the other way.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

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