Is Australia's Aggressive Interest Rate Cut The Start of a Global Coordinated Rate Cut?

photo of reserve bank australia - building logoWondering why Asian markets are rallying tonight after the DJIA and Nasdaq were slaughtered on Monday?

Australia's Central Bank cut its benchmark interest rate by one full percentage point tonight, which was twice as much as expected. Many are speculating (and they will probably turn out to be right) that this is the beginning of a coordinated global interest rate cut that will be followed by many other central banks.

Experts expect that the Bank of England, the European Central Bank, the U.S. Federal Reserve and banks in Asia will soon slash interest rates aggressively as well in an attempt to unclog credit markets.

An aggressive rate cut in the United States is a certainty at this point. Most were predicting that the Fed would cut by 75 basis points, but it looks like it might be 100 now. The government is also apparently putting together a plan to buy "commercial paper", which is a mechanism that many companies use to fund their day-to-day operations. The "commercial paper" market has completely dried up as of late, and this threatens to completely shut down the US economy.

The question is - how will the markets react if there is in fact a coordinated global interest rate reduction over the next day or two? Many investors seem to be of the opinion that this will create a massive rally that they will be able to sell some of their positions into. Many were expecting the same thing after the bailout bill was finally passed, only to find that the markets violently sold off.

Needless to say, Tuesday will be another very interesting day for the stock markets.

Filed under: The Economic Meltdown | General Market News

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