In a co-ordinated move, the central banks of the US, UK, Europe, Switzerland, Sweden and Canada agreed to cut their official interest rates by 0.5 percent on 8 October. Subsequently, the central banks of China, United Arab Emirates, Taiwan, Hong Kong and Korea also lowered their official rates.

The current level of interest rates in the various countries that have had rate cuts:

• US: 1.5 percent (from two percent)

• UK: 4.5 percent (from five percent)

• Europe: 3.75 percent (from 4.25 percent)

• Switzerland: 2.25 percent (from 2.75 percent)

• Sweden: 4.25 percent (from 4.75 percent)

• Canada: 2.5 percent (from three percent)

• China: 6.93 percent (from 7.2 percent)

• United Arab Emirates: 1.5 percent (from two percent)

• Taiwan: 3.25 percent (from 3.5 percent)

• Hong Kong: two percent (3.5 percent)

• Korea: five percent (from 5.25 percent)

The aim of the co-ordinated rate cuts in the US, UK, Europe, Switzerland, Sweden and Canada was to restore investor confidence, which has been severely affected by the crisis in the financial markets. The joint effort made a more powerful statement than a rate cut by a single central bank. The cuts also aimed to minimise currency fluctuations. However, after a brief respite, investors continued to sell equities aggressively resulting in further declines in global markets.

World markets remain volatile

Global markets have experienced significant volatility and declines as a result of the crisis. Despite the announcement of a rescue package and interest rate cuts, fears of a global recession persisted and have placed pressure on equity markets.

Growth concerns

The International Monetary Fund (IMF) called for 'coherent and decisive policy measures' to bring confidence back into financial markets and prevent a global recession. According to the IMF, global growth is likely to slow to 3.9 percent in 2008 and three percent in 2009, down from the five percent growth recorded in 2007. Importantly, global growth remains positive. Growth in South Africa is expected to slow in 2008 and 2009, returning to 4.5 percent in 2010.

Implications of the central banks’ actions

The united actions by central banks, the series of capital injections and the US and UK rescue plans emphasise the authorities’ commitment to restoring investor confidence, reviving credit flow and averting a global recession. Global central banks will continue to cut interest rates and provide the necessary liquidity to financial markets until this is achieved.

At the Monetary Policy Committee meeting on Thursday, the South African Reserve Bank decided to keep the repo rate on hold at 12 percent. The following were cited as the main reasons for the decision:

• The weakening of the Rand has emerged as a significant risk factor.

• The inflation outlook has improved on account of the lower oil price.

• Wages show that inflation expectations are not anchored.

• The lower oil price has been offset by the weaker Rand.

• A decline in asset prices may moderate further consumption.

• Economic growth is likely to remain below its estimated potential.

• The full extent of the global financial crisis is still unclear.

The bottom line

Global central banks are likely to continue to work together to restore trust and confidence in the global financial system. Financial markets will remain volatile and highly sensitive to any news releases. Now, more than ever, a focus on long-term objectives is essential. As always, our trusted advice is for investors to stick to well-diversified investment strategies. In this way, patient investors will benefit from strong upside potential once markets stabilise over the longer term.