By Anne D. Picker, International Economist, Econoday
Monday, December 9, 2002

The week was not without drama. First the European Central Bank finally lowered their key policymaking interest rate by 50 basis points to 2.75 percent. This was followed by a disappointing U.S. employment situation report that showed a jump in the unemployment rate and a contraction in the number of jobs. Then within an hour after the report, the twin announcements that both Treasury Secretary Paul O'Neill and economic advisor Larry Lindsey had been forced out of the Bush administration came across the wires. This was almost too much for investors to absorb. On one hand, the resignations had been expected, but no one expected them in the shadow of the employment report!

Market players already had a rocky week due to vague threats of more terrorism on U.S. soil, an explosion in Indonesia, and the December 8th U.N. deadline on Iraqi weapons. Sunday was the deadline for Iraq to comply with the United Nations resolution requiring it to declare whether it has weapons of mass destruction. Iraq submitted a copious document and said it had no weapons of mass destruction. The situation in Iraq is being followed very closely in the capital markets in particular. Stock and bond traders are very concerned about what war would mean economically and politically. Add to this some less than satisfying economic data, and investors shied away from equities. Markets do not like uncertainty and they were trying to deal with an already full plate. On the week, all equities indexes followed here with the exception of the Toronto S&P/TSX composite sank. (Toronto eked out a mere 0.1 percent gain.) Losses ranged from 0.5 percent (Mexican Bolsa) to 4.2 percent (Paris CAC).

A week chuck full of central bank activities
Investors were relieved that the European Central Bank finally lowered interest rates by 50 basis points. Virtually everyone had been lobbying for the move, which the ECB had, until Thursday, ignored. With inflation hovering over the Bank's 2.0 percent ceiling target and M3 money supply growth significantly missing its 4.5 percent target, the Governing Council had refused to ease monetary policy even in the face of stalling EMU growth.

The Bank of England's Monetary Policy Committee announced after its regular monthly rate-setting meeting that it had voted to leave its key interest rate at 4.0 percent. As usual, it gave no explanation for its decision. The Bank last changed its key interest rate in November 2001, when it cut rates by 50 basis points. The last time the BOE left policy unchanged for 13 months in a row was in 1959. Details of the decision will not be available until the minutes of this meeting are published on December 18th. The British economy continues to perk along despite an anemic manufacturing sector.

The Bank of Canada as expected left their key policymaking interest rate at 2.75 percent. The Bank cited lower-than-expected economic growth in the second half of 2002 because of continuing financial and geopolitical uncertainties and general global weakness. The Bank of Canada previously raised interest rates in April, June and July of 2002.

The Reserve Bank of Australia kept its benchmark interest rate unchanged for a sixth month at 4.75 percent as slowing global growth reduced exports and a worsening drought cut crop production to 20-year lows. The bank raised borrowing costs by 25 basis points in May and again in June. The bank doesn't release a statement explaining its decision when rates are unchanged.

In addition, the Swedish Rikesbank and the Bank of Denmark surprised investors and lowered their key interest rates by 25 basis points to 2.75 percent and 50 basis points to 2.95 percent, respectively.

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