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

Earnings continue to disappoint
With little in the way of economic news investors were on their own last week, focusing on earnings prospects and central bank activities. In Australia, the Reserve Bank of Australia cut interest rates by 50 basis points to 5.75 percent as recent data suggest the economy is slowing after 14 quarters of plus-4-percent growth. In Britain, the Bank of England edged the policy making interest rate down by 25 basis points to 5.75 percent. Preliminary fourth quarter growth slowed to 0.3 percent. Inflation is tame, remaining below the 2.5 percent target rate for the past 21 months. The Bank of England's interest rate is above both the United States (5.5 percent) and the ECB (4.75 percent).

The Bank of Japan cut its largely symbolic discount rate to 0.35 percent from 0.5 percent. Japan's key interest rate, the overnight call rate, was kept at 0.25 percent. The discount rate is the rate at which commercial banks borrow from the central bank. It is rarely used and is not as important as the overnight call rate, which governs the rate at which commercial banks lend to each other. The Bank of Japan, led by Governor Masaru Hayami, had not cut the discount rate since September 1995. The BoJ also said Friday it will make borrowing on the discount rate easier for commercial banks. But with the discount rate 0.1 percent higher than the interbank rate, it is unlikely that many banks will make use of it.

The move is being interpreted as an attempt by the central bank, which is independent of the Ministry of Finance, to keep the government's feet to the fire so that the government will tackle the country's economic problems. Hayami has been an advocate of kick starting the economy through structural reform. Financial markets interpreted the discount rate cut as sign the bank is prepared to ease monetary policy further if the economy continues to deteriorate. Keeping the BoJ clear of the overnight rate are worries that a cut there would ease political pressure for banking sector reform.

The interest rate cut comes days after the Japanese government revised down figures for the country's gross domestic product, which shows that the economy shrank by 0.6 percent for the July to September quarter. The revised figures have revived fears over Japan's depressed economy, which will fall into recession again should gdp contract in the next quarter as well.

All equity markets tracked here fell last week as continued earnings disappointments and lowered projections for future earnings depressed investors. The Dow, Nasdaq, Toronto Stock Exchange composite 300 and FTSE 100 gave back whatever they had gained in 2001 because of weak technology stocks and dismal earnings.

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