Can Rate Cuts Cure Auto Finance Woes?
The Auto Finance Summit is still going on in Las Vegas, and already the core message of this year’s gathering is clear: auto finance needs capital markets relief.
I certainly hope today’s actions by central banks around the world do the trick (although I am not encouraged).
Today, the Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Bank of Sweden, and the Swiss National Bank each cut their benchmark rates by 50 basis points. The Bank of Japan, which didn’t participate in the move, said it supported the action, Bloomberg reported.
Separately, China’s central bank lowered its key one-year lending rate by 27 basis points.
The move is a drastic effort to improve liquidity. It also marks a decided turn to an inflationary monetary policy. The joint statement from the central banks specifically addressing inflation, argues that “inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices” — meaning that declining commodity prices are offset the massive infusion of capital into the monetary supply. The central banks believe that “inflation expectations are diminishing.” They also see that the “recent intensification of the financial crisis … augmented the downside risks to growth and thus has diminished further the upside risks to price stability.” In other words, the central banks are saying that inflation becomes a non-issue if the global economies decline.
That’s all well and good, but I heard more than one perspective over the last couple of days at the Auto Finance Summit that projects the central banks — or at least the Federal Reserve — will specifically seek out an inflationary economic policy. With inflation, the argument goes, consumers can “inflate” out of their housing problems and investors will be forced to acquire assets, rather than avoid investments in favor of cash. It would appear that we are at least heading down that path.
JOINT STATEMENT BY THE CENTRAL BANKS
Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.
Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.
Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.
