Outlook: Rate cuts may herald more gloom

EUROPEAN CENTRAL bankers seem to be doing a passable imitation of those cartoon characters who keep running beyond the cliff edge, but suddenly plunge earthwards when finally they come to look down. The bankers looked down, and decided interest rate cuts might be a good idea after all.

It is only a month since the head of the new European Central Bank, Wim Duisenberg, said lower borrowing costs were unnecessary - a message repeated in briefings by other European central bankers. And it is less than two months since the G7 poured cold water on the idea that a round of co-ordinated interest-rate cuts was needed; 54 central banks around the globe have since, coincidentally, cut rates.

These cuts, which include two in Britain, are a welcome enough response to global financial turmoil and the related economic slowdown. It is a relief to know that even the most hawkish of bankers - and they do not come any tougher than the Bundesbank's Hans Tietmeyer - have recognised the need to stabilise the world economy.

But hold on a minute. If even the most reluctant central bankers now admit there is a need to take action, what does that say about the outlook? A great deal seems to be the answer, and it is almost uniformly gloomy. Nowhere on the planet is there unremittingly good economic news; even in the roaring US economy the picture is mixed. While it is true that Alan Greenspan has been cutting US interest rates mainly to prime the world economy, rather than for domestic reasons, his motives are not entirely altruistic. The US cannot remain immune to what's going on elsewhere.

Even more worrying is the possibility that financial markets hold more nasty and destabilising surprises. The Brazil rescue package is on the rocks, with the IMF and G7 committed to defending the indefensible. Given the slightest chance the markets will sink the Brazilian currency with the same gusto as they did the Russian rouble. Other turbulence may lie in store as banks and funds try to unwind earlier loss-making positions before the year-end.

So far, the main Western equity markets have been able to shrug off any setbacks. The extraordinary persistence of the post-war bull market has taught investors that it pays to buy on the dips. What Alan Greenspan described two years ago as irrational exuberance seems to have become eternal exuberance.

What's more, this may be justified. Central banks seem prepared to flood their markets with liquidity for the sake of economic stability. Cheaper money means more expensive financial assets, and that includes equities. Thus even in a recession, when earnings and dividends can be expected to fall, equities are going to be dragged up in value in line with bonds. That, in any case, is the logic of the process. One day the stock market bubble will burst - but not until the bankers feel they can reverse course - or, to put it another way, not until inflation starts to look more likely than deflation once more

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power