Scotia Capital Analyst: Central Banks Need To Make Further Cuts

Coordinated 50 basis point interest rate cuts by the world’s major central banks on Wednesday morning came on the heels of yet another overnight flight to the safe haven of U.S. dollar treasuries, further pain for global equities, the VIX soaring to 54 and interbank funding spreads reaching new records.

As expected, the move on rates was downward. However, they will not be adequate and centrals banks will need to cut rates further, says Scotia Capital. Economists Derek Holt and Karen Cordes told clients that the Bank of Canada and U.S. Federal Reserve could easily reduce rates by another 100 points or more.

The economists said:

The risk is that 50bps wasn’t enough, and that none of that will pass through to consumers and businesses as interbank funding pressures continue to worsen even after the rate cut.

While the Bank of Japan opted out of the effort since rates there are already at “rock bottom,” it expressed strong support of the policy actions as new figures show that business bankruptcies there soared 34% year-over-year, the sharpest increase in eight years, Scotia noted.

In the U.K., the government unveiled a broad bailout that will see it invest in some of the country’s biggest financial institutions. But the markets were not all that impressed and “what it said by way of deepening concerns is what drove the FTSE 100 down sharply.”

Pending home sales in the U.S. likely fell in August and it looks like many won’t close in this month, the economists said.

As for Canada, they said the housing market has been correcting all year with residential construction spending down in the first two quarters and housing starts well off their September 2007 peak. “A turn from a seller’s to a buyer’s market has driven prices down by 5% over the past year, with more to come.”