By Anne D. Picker, International Economist,Econoday
Monday, November 12, 2001

Overseas markets were closed by the time the Federal Reserve announced its decision on Tuesday to reduce interest rates, but the response the day after was less than enthusiastic. The Fed's action points to continuing weakness in the U.S. economy and shows the limits that monetary policy is facing during this downturn. The move to 2 percent put the Fed funds rate at its lowest level since 1961 and marked the 10th reduction since the beginning of the year. The Fed was supported later in the week by interest rate cuts in Britain and the European Monetary Union as the fight spreads against the worldwide economic decline.

The European Central Bank and the Bank of England cut their benchmark interest rates by 50 basis points each. The ECB lowered its rate to 3.25 percent, the fourth reduction this year and only the fifth since the bank took control of rates in January 1999. The ECB, which has reduced rates by 150 basis points so far this year, last cut rates on September 17 in a concerted move with other major central banks in the wake of the September 11 terrorist attacks. The ECB is accelerating rate cuts as the likelihood of a U.S. recession threatens to shrink the region's already weak economy even more. EMU growth was an anemic 0.1 percent in the second quarter. Fourteen percent of Europe's exports find their way to the United States.

The Bank of England pared its policymaking interest rate to 4 percent, reducing borrowing costs for the seventh time this year and taking rates to their lowest level since February 1964. These moves were taken despite Britain's positive growth rate (in comparison with U.S. drop in GDP) in the third quarter.

The Reserve Bank of Australia left its policymaking interest rate at 4.5 percent primarily because of the national election on November 10. The bank has already reduced its key rate 175 basis points to 4.5 percent. Analysts expect the Bank to reduce interest rates possibly as soon as this week or in December, in an effort to boost consumer confidence and spending before Christmas. Exports make up one-fifth of the nation's economic production.

On the week, all equities indexes followed here rose with the exception of the Nikkei 225 and the Mexican Bolsa.

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