Money market freeze stirs rate cut speculation

Reuters September 30, 2008

By Eric Burroughs

TOKYO (Reuters) – Central banks and regulators scrambled on Tuesday to relieve the strain on financial markets frazzled by another hefty blow to confidence, this time from the rejection by U.S. lawmakers of a $700 billion rescue plan.

Global central banks more than doubled the amount of dollar funding to $620 billion, but the move showed no signs on Tuesday of thawing the freeze in money markets where banks are hoarding cash and bracing for more trouble ahead in the deepening year-long credit crisis.

Analysts said central banks may now be forced to cut interest rates in a coordinated move because their massive fund injections have done little to ease strains that are threatening to become a bigger systemic breakdown that could endanger the global economy.

After the U.S. House of Representatives rejected the bailout for the U.S. financial system, Wall Street shares suffered their biggest sell-off since the 1987 crash. Asian shares were battered as well, falling 3-5 percent.

“The case for large synchronized global rate cuts is stronger than ever before,” said Rory Robertson, interest rate strategist at Macquarie in Sydney.

Australia, Britain and Europe are working to convince U.S. lawmakers to pass the $700 billion rescue package, which would allow the U.S. Treasury to buy up bad debt from banks, Australia’s prime minister, Kevin Rudd, said on Tuesday.

“What’s important is that all people of good will around the world act in concert with our friends in the United States to see the right measures taken through the U.S. political process to stabilize the global financial system,” he told a press conference.