China’s central bank has cut interest rates for the first time in six years amid growing turmoil in global financial markets.

The key lending rate will fall to 7.2% from 7.47% with effect from Tuesday, while the amount of cash most banks must keep in reserve was cut by 1%.

The surprise move comes as US bank Lehman Brothers files for creditor protection and world shares tumble.

With inflation cooling, China is keen to maintain stable economic growth.

“We all knew that there would be monetary policy relaxation in China, but we didn’t expect the move would be so quick,” said Gao Huiqing, an economist at the State Information Centre, a government think tank.

All but the biggest banks will be allowed to reduce the proportion of deposits held in reserve from 25 September – the first time the central bank has cut reserve requirements since November 1999.

Pro-growth stance

Recent figures have shown that Chinese economic growth has slowed this year as a result of constrained demand for its goods from overseas markets.

The economy grew at an annual rate of 10.1% in the three months to June, down from 10.6% in the previous quarter and below the 11.9% seen for the whole of 2007.

Rising food prices helped to crimp growth as did the increasing cost of credit with six increases in interest rates last year aimed at bringing spiralling inflation under control.

Grain and pork shortages had pushed consumer prices to 11-year highs earlier this year, but government measures have helped to bring this figure down to 4.9% in August – a 14-month low.

This enabled Beijing to cut interest rates to boost consumer spending and offset a decline in demand for exports as the global economy slows.

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The fall in house prices during the past year has been confirmed by the government’s own house price index.

Published by the Communities and Local Government department (DCLG), it shows that prices in July were 0.3% lower than a year ago.

That was despite a surprise 1% rise in prices during the course of July.

House prices have fallen in the past year, by about 11% some leading lenders say, because the credit crunch has choked the supply of mortgage funds.

“The current issue affecting the market is largely about the supply of credit – a very different situation to the early 1990s which was about high interest rates and unemployment,” said a DCLG spokesman.

Completions

The DCLG survey, based on completed sales, shows that prices have now dropped for the ninth month in a row, which has taken the average UK property price down to £217,171.

However the picture is not uniform across the country.

Prices are down by 0.3% in England, 0.8% in Wales and 10.3% in Northern Ireland.

But in Scotland prices have risen by 3.6% over the past year.

Surveys from lenders such as the Halifax and the Nationwide have suggested that the fall in prices, in the year to August, has been much steeper than that recorded by the DCLG.

That may be due to different methodologies used in their surveys.

The lenders base their figures on prices quoted when they approve their mortgage loans.

Whereas the DCLG’s survey is calculated by using completions, based on a survey of about 50,000 sales from 60 mortgage providers, a month behind the lenders.

Gloomy predictions

Economists said that because of this lag, the government’s own figures may get worse.

Seema Shah, at Capital Economics, said that with “other more timely measures of house prices weakening drastically in the past few months, and with the economy heading for recession, those falls are likely to intensify over the coming months”.

Analysts agree that the housing market has undergone a very severe and sudden contraction after more than a decade of steeply rising prices.

Sales are down by about 50% in the past year; mortgage approvals are down by more than 70% suggesting that sales have further to fall; and last week estate agents reported that in the three months to August, some of them were selling fewer than one property per week.

The head of the Nationwide building society, Graham Beale, has said that house prices might end up falling by as much as 25% from their peak seen in Autumn 2007.

And Andy Hornby, the chief executive of HBOS, which owns the UK’s biggest mortgage lender the Halifax, has predicted that the credit crunch that is restricting lending would last well into next year.

Mortgage costs

Fixed-rate mortgage deals may be about to become more expensive as the cost of raising mortgage funds in the financial markets starts to rise.

The cost of inter-bank borrowing, as reflected in the BBA Libor three month sterling rate, rose today from 5.715% to 5.791%.

This was the biggest rise in one day since the US investment bank Bear Stearns had to be rescued in March.

In the past six weeks the average interest rates on the best two-year fixed rate mortgages had fallen by 1.16%, according to the financial information service Moneyfacts.

The best three-year fixes had come down by 0.56% and five-year fixes by an average of 0.4%.

But Michelle Slade of Moneyfacts said this trend could come to an end because of the crash of the US investment bank Lehman Brothers, and fears that other banks may be pushed into a weaker financial position.

“The number of cuts to mortgage rates has slowed in the last week,” she said.

“Lenders are likely to be playing a wait and see game at the moment to see how things pan out in the money markets before they make their next moves,” she added.

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US consumer prices fell in August for the first time in nearly two years due to lower energy costs, data shows.

Labor Department figures showed the Consumer Price Index (CPI) was 0.1% lower month-on-month, and followed July’s 0.8% increase.

However on a yearly basis, prices were 5.4% higher.

The news comes as the US central bank meets to decide on interest rates, with some analysts saying the drop could make a rate cut more likely.

“If the Fed is thinking of cutting interest rates this afternoon, this gives them a little more freedom to do that,” said Robert McIntosh, lead economist at Eaton Vance.

It had been widely expected that the Federal Reserve would opt to leave interest rates on hold at 2%.

But in light of significant turmoil in the financial markets, and uncertainty over the health of the world’s largest economy, there are expectations that the central bank could lower rates.

The demise of Lehman Brothers and uncertainty over the future of insurance giant AIG, as well as the acquisition of Merrill Lynch by Bank of America have all added to market jitters.

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The US central bank has left interest rates unchanged at 2%, citing inflation concerns and rejecting calls for a cut.

While the Federal Reserve had been tipped to leave rates on hold, analysts said a cut looked more likely after Lehman Brothers filed for bankruptcy.

The Fed has sought to soothe nerves and earlier injected $70bn (£39bn) into markets to boost liquidity.

Central banks worldwide have faced the twin threat of quickening inflation and a wider economic slowdown.

“The downside risks to growth and the upside risks to inflation are both of significant concern to the committee,” the bank’s officials said.

Michael Wallace, an analyst at Action Economics said: “The Fed’s statement largely resisted market pressure for a more substantial capitulation.”

He said the assessment was “defiantly set at neutral”, in expressing worries about both slowing economic growth and inflation.

The decision to leave rates at 2%, as it has been since April, was a unanimous move.

US shares were volatile with the leading Dow Jones Industrial Average down 106 points to 10,811 after the news.

However, it later ended more than 140 points higher at 11,059.02 as investors interpreted the Fed’s decision as a sign that the economy was less fragile than some had feared.

Another factor boosting the market were reports that insurance giant AIG might be able to access a loan from the Federal Reserve, which would prevent the firm from collapsing.

Investment firm Lehman Brothers filed for bankruptcy on Monday, triggering market jitters and prompting a sharp fall in shares worldwide.

Fears have been raised that AIG could be the next firm to fold.

Serious risk

In light of such turmoil, certain traders had hoped the central bank would cut rates in a bid to boost the economy and warned that the Fed’s latest move could be seen negatively.

Ian Shepherdson, lead US economist at High Frequency Economics said: “Not to acknowledge the catastrophes of the next few days runs the very serious risk that the Fed will be seen as Nero, fiddling while Wall Street burns.”

While the Federal Reserve kept interest rates unchanged on Tuesday, it noted that stresses on financial markets had grown sharply and added that it would take further action if needed.

The central bank said “strains in financial markets have increased significantly and labour markets have weakened further”.

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The world’s poorest countries could see the impact of the credit crunch worsen next year, a UN report has warned.

Growth in developing countries is expected to be 1% lower this year as a result of the world slowdown.

But the pain could be greater next year, according to Unctad, the UN agency that speaks for developing countries.

It warns that a combination of high food and oil prices, and slowing global demand, could squeeze poor countries.

Inflation threat over-stated

Unctad’s Secretary General, Supachai Panaitchpadki, told BBC News that both rich and poor countries should be “wary” of raising interest rates to curb inflation.

“In the current fragile condition of the global economy, measures to tighten monetary policy would exacerbate the global slowdown,” Unctad’s Trade and Development Report says.

Unctad believes that the danger of inflation is over-stated, as the slowdown will curb inflationary pressures, and commodity and oil prices will stabilise broadly around current levels.

However, it says that the lack of “policy coordination” on both monetary policy and exchange rates is hurting the prospects for recovery.

Unctad says it is extraordinary that in the US, interest rates have been cut, while in Europe they have been raised during the crisis.

And it warns that further adjustments in the dollar will be painful unless the current account surplus countries, including Germany, Japan and China, expand their domestic economies.

“These divergent policies may invite renewed speculation in foreign exchange markets instead of calming the system,” the report adds.

Global imbalances

Poor countries are completely dependant on donor countries due to global economic crunch. I fear that hundreds of thousands more people in poor countries will go beyond poverty line.
Syed A Mateen , Karachi, Pakistan
Send us your commentsDr Supachai says that competition among Asian exporters by keeping exchange rates low will ultimately prove counter-productive – and he argues that China should move more quickly to adjust its over-valued currency.

He says that the imbalance between a closely-regulated system of world trade, and a much more loosely regulated international financial system has become more apparent since the credit crunch began.

“The financial turbulence, the speculative forces contributing to commodity price hikes and instability, and the apparent failure of foreign-exchange markets to bring about changes in exchange rates that reflect current-account trends suggest that there is an urgent need for reviewing the institutional framework of the global economy,” the report says.

Commodity worries

Unctad says that high commodity prices for food, minerals and oil are having mixed effects on developing countries.

While some primary product exporters are enjoying boom conditions, the money is not trickling down to reach the poor.

The higher price of food, in particular, is hitting the urban poor and making it more difficult to reach the Millennium Development Goals.

And the dependence on one or two primary products for exports makes many developing countries vulnerable to rapid changes in commodity prices.

This is particularly true in Africa, which is expected to grow on average by 6% in 2008, stronger than in many years, on the back of higher oil and mineral prices.

Most African countries – 45 in total – depend on commodities for 50% of their exports, and in more than half of them, one single commodity makes up 50% of exports.

The same is true of 20 of 38 Least Developed Countries.

Unctad says that the commodity boom, though fundamentally driven by the economic expansion in emerging market countries, was pushed higher by speculation in financial markets.

It is therefore concerned that such speculation could also “amplify the downward movement” especially if “forecasts for global growth need to be adjusted downwards as a result of further turmoil in financial markets”.

Tax on petrol

Unctad says that in order to meet the Millennium Development Goals, rich countries must increase their aid flows by around 50%, to between $50bn (£28bn) and $60bn, as promised but not delivered at the Gleneagles Summit.

And it says that more money is needed if poor developing countries are to increase their economic growth rates.

The report suggests that new financing mechanisms might be considered to raise such sums, including a possible one cent tax on petrol worldwide – which it says could raise $180bn for development.

Previous suggestions for such global taxation have fallen on deaf ears, including an earlier plan to tax global foreign currency taxation, and a solidarity levy on global air travel (which has been introduced by France and five other countries, and is yielding 200m euros yearly to fight diseases in poor countries).

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Australia’s central bank has cut interest rates for the first time in seven years as its economy slows.

The Reserve Bank cut rates to 7% from 7.25% to spur growth amid poor retail sales, weak business confidence and slower jobs growth.

Prime Minister Kevin Rudd said the rate cut would be a relief for homebuyers but warned that there would be more tough times ahead for the economy.

Analysts said high inflation would make further rate cuts difficult.

Australia’s central bank, like its counterparts in Europe and the US, faces the challenge of balancing slower economic growth with the threat of inflation because of high food and energy prices.

“Weighing up the available domestic and international information, the Board judged that there was now scope for monetary policy to become less restrictive,” said the Reserve Bank’s governor Glenn Stevens.

The central bank had increased the cost of borrowing as recently as March, lifting rates to a 12-year high as it battled a pick-up in inflation.

But the last few months have also seen household spending fall in the face of record petrol prices and the rising cost of living.

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A sharp downwards revision of the growth figures has raised hopes that the Bank of England will reduce interest rates by the end of the year, with more aggressive reductions following in 2009.

The Office for National Statistics’ downgrading of growth during the second quarter from 0.2 per cent to zero prompted many observers to revise their previous predictions for rates.

The pound traded lower, with dealers pricing in a reduction in the yield on sterling investments being made effective sooner rather than later; the pound hit a one-week low against the euro.

“This really does put a rate cut firmly on the agenda, although it is unlikely to come until we have seen the peak in inflation,” said Brian Hilliard, an analyst at SG.

The disappointing news on growth came in a week when the minutes of the last meeting of the Bank of England’s Monetary Policy Committee were published. These again showed a three-way split in voting, with only one member voting for a cut and one opting for a price hike, both of a quarter percentage point. However, the minutes also indicated that the case for a cut had been given a much more thorough airing than in previous sessions, and economists generally agreed that, while couched in their usual balanced fashion, the minutes could bear a slightly “doveish” interpretation.

There has also been a run of poor data on the housing market, investment and consumer and business confidence, and ambiguous evidence about consumer spending, adding to the pressure on the Bank to reduce the official cost of borrowing from the current 5 per cent.

Matthew Sharratt, UK economist at Bank of America, added: “We now believe the Bank is likely to start easing by year-end already, despite concerns about the near-term inflation profile. We had expected for some time that the Bank of England will cut the Bank Rate to 4.0 per cent by the third quarter of 2009. We now add a further cumulative half percentage point of easing to take rates down to 3.50 per cent by end-2009.”

Voices from the “real economy” were also urging action. David Kern, economic adviser to the British Chambers of Commerce, said: “The revised GDP figures confirm that the Office of National Statistics’ original second-quarter estimate was too optimistic. The messages signalled by our Quarterly Survey were more realistic. The figures show that manufacturing and construction declined in the second quarter, and total GDP stagnated. Given the heightened threats of UK recession, it is vital that the MPC starts cutting interest rates in October or Nov-ember, as soon as it is clear that CPI inflation has peaked.”

As to timing, a consensus is emerging that November would be the ideal moment for the Bank to cut rates. By then, inflation should have peaked, at more than 5 per cent in September, and the growth estimates for the third quarter of the year will almost certainly point to recession. November sees the publication of the Bank’s next quarterly Inflation Report, its definitive view of the economy, which will give it ample opportunity to explain why it is cutting interest rates when inflation will still be more than double the official 2 per cent target.

The previous assumption was for rates to remain on hold for the rest of this year with a cut coming in February, when inflation could be demonstrated to have embarked on a downward path. However, the accumulating evidence of a rapidly cooling economy has changed the climate of economic opinion in the City, as it may well do in the MPC itself.

News reported by The Independent

US private equity firm Lone Star is to take over German lender IKB Deutsche Industriebank, according to KfW, the German firm’s biggest shareholder.

State development bank KfW has not given details of its plan to sell its 90.8% stake but one source told Reuters it was worth about 100m euros (£79m).

IKB was one of Europe’s first firms to be hit by the US sub-prime crisis.

KfW and other firms intervened to stop IKB from going bankrupt in a rescue package worth several billion euros.

KfW has a 45.5% share in IKB but that is set to increase to 90.8% in an already-agreed deal.

Like other banks, IKB invested in financial products backed by mortgages given to US homeowners with poor credit histories.

IKB faced the threat of bankruptcy as it emerged that it had around $24bn in investments connected to high risk loans.

Once interest rates rose, many borrowers were unable to meet their monthly payments, thereby defaulting on their loans.

More details of the sale are expected to be given at a news conference later on Thursday.

Lone Star – which manages more than $13bn in assets – is reported to have beaten off competition from Swedish bank SEB and fellow US private equity group Ripplewood.

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Japan’s trade surplus shrank by more than expected in July, due to weaker US demand and an increase in oil imports.

The surplus fell to 91.15bn yen ($830.5m; £444.2m), down 86.6% from the same period a year earlier.

China became Japan’s biggest export destination, overtaking the US for the first time since World War II, on the back of demand linked to the Olympics.

But there are fears that Japan, which earlier this week kept interest rates on hold, could fall into recession.

Oil prices

Demand from developing countries such as Russia and the Middle East helped to increase exports.

But JP Morgan analyst Masamichi Adachi said the outlook for the Japanese economy “essentially hinges on a recovery in the US economy”.

Exports rose 8.1% to 7.63 trillion yen while imports were 18.2% higher at 7.54 trillion yen.

“Imports are surging in value, which shows that high crude oil prices continue to hurt companies revenues and are leading to an outflow of income from Japan,” said Yoshiki Shinke, economist at Dai-Ichi Life Research Institute.

Oil prices are up sharply on a year ago, and hit a record above $147 a barrel in July – although prices have fallen in recent weeks.

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A glimmer of hope for hard-pressed businesses and homeowners emerged from the latest minutes of the Bank of England Monetary Policy Committee (MPC) – with some observers predicting a cut in interest rates by the end of the year as inflation eventually subsides. It came on a day of yet more gloomy news on the economy,

At its last meeting, the MPC voted by seven to two to keep rates on hold at 5 per cent, with one member, Tim Besley, voting for a quarter percentage point rise and another member, David Blanchflower, opting for a quarter percentage point reduction, as he has for some months.

This three-way split repeats the pattern seen in July, but observers detected there was more thought given this time to the merits of reducing rates immediately. While balanced, the minutes welcomed signs that inflationary pressures were easing – especially the 15 per cent fall in the oil price. The MPC was also encouraged by the muted level of wage settlements and inflationary expectations.

David Page, an economist with Investec, said: “The seemingly softer tone to the Committee’s discussion, in keeping with a more muted outlook in the Inflation Report, does seem to have pretty much ruled out any prospect of a rate hike (which was already slim) as it would risk an ‘unnecessarily deep’ downturn.”

Amit Kara, of UBS, said: “Although we envisage the first rate cut next year, there is every chance that the MPC begins to cut as early as November, especially if commodity prices continue to fall and economic activity falters, as expected.”

Evidence that the economy is indeed faltering mounted yesterday. The Bank’s own Agents Survey, drawing on impressions from regional representatives, noted that “concerns about demand were a more important factor in restraining investment than restrictions in the supply of credit, although credit was becoming harder to obtain”. Consumer spending on “big ticket” items, such as televisions and cars, and on eating out is being hit especially badly.

The CBI added to the downbeat mood as its Industrial Trends Survey put business sentiment at a seven-year low. Nor was there much cheer from the beleaguered housing market: the Council of Mortgage Lenders announced gross lending for house purchases running 27 per cent lower than it was a year ago.

News reported by The Independent