By Anne D. Picker, International Economist,Econoday
Monday, December 10, 2001

Although all equities indexes tracked here were up on the week, they closed Friday on a sour note as a disappointing U.S. jobs report dampened investors' enthusiasm and renewed fears about worldwide economic weakness. Friday's downward pressure, especially in Europe, Britain and the United States, was also the result of some profit taking after a run-up earlier the week. Before Friday, investors were first ruffled by possible ripples from the Enron collapse then encouraged by some positive U.S. economic numbers.

Moody's Investors Service joined Fitch and Standard & Poors and lowered the rating of yen denominated domestic securities issued or guaranteed by the government of Japan to Aa3 from Aa2, and maintained a negative outlook on the rating. Moody's decision was prompted by fiscal strains that will likely persist owing to the country's on-going economic weakness and the elusiveness of effective policy remedies. The rating agency said deflation is exacerbating overall credit risks throughout the economy as debt rises in real terms. Neither current macroeconomic policies nor new reform initiatives offer much tangible hope for an early turnaround in economic performance.

Central bank news -
The Reserve Bank of Australia cut its policymaking interest rate by 25 basis points to a 28-year low of 4.25 percent. The Bank said a housing boom that fueled economic growth in the third quarter would ease next year. This was the sixth cut in the overnight cash target rate this year and is expected to help Australia ride out the worldwide slowdown. The RBA has reduced interest rates 200 basis points this year. Because Australia's economy has been gathering momentum, the central bank hasn't had to cut rates as much as the United States. The Australian economy grew an annualized 4.4 percent in the third quarter. Australia's two largest export markets, Japan and the United States, are in recession, which is cutting demand for the nation's goods and reducing tourism.

Both the Bank of England and the European Central Bank kept their benchmark interest rates at 4 percent and 3.25 percent, respectively. The British economy continues to outperform the United States, German and Japan, which are currently shrinking. The Bank of England's monetary policy committee has cut rates seven times this year, from 6 percent in January to the lowest level since 1964.

The European Central Bank also announced that it was leaving its M3 money supply reference growth rate - one of its key inflation indicators - at 4.5 percent. Thursday's monetary policy meeting was the last before euro notes and coins begin circulating on January 1, perhaps making the Bank reluctant to change monetary policy under these circumstances. The ECB has lowered their policymaking interest rate four times this year from 4.75 percent to its current level.

Finally, the Swiss National Bank, as expected cut its target range for its policymaking interest rate - the 3-month Libor rate - by 50 basis points to 1.25-2.25 percent. They cited the continued deterioration in the global economy and the tame outlook for Swiss inflation. The Bank has been concerned with the rise in the value of the Swiss franc as well. This is the third 50 basis point cut by the SNB since mid-September. They have cut rates by 175 basis points this year.

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