Opinion: Credit Crunch makes 50bps OCR cut more likely
18th Sep 08, 11:32am
By BNZ Currency Strategist Danica Hampton Reading the headlines in the financial section over the past few days, you'd be forgiven for thinking the world is coming to an end. Lehman Brothers, a corner stone of the US banking industry, has filed for bankruptcy. Merrill Lynch has been purchased by Bank of America and AIG, the United States' biggest insurance company, is struggling for survival. Financial institutions have become very reluctant to lend anything to anyone, in case they have large exposures to Lehmans, AIG, or the next financial disaster that may be lurking around the corner. These counterparty concerns have seen tensions across global money markets escalate and short-term money market rates skyrocket. Market participants around the world are left struggling to digest what it all means for equities, interest rates and currencies. Fraught with uncertainty, most investors are reacting to every headline and financial markets have become extremely volatile. Expect this volatility to remain, while uncertainty persists. The credit crisis is not new news. We've been talking about the slump in credit markets and the struggles plaguing the banking sector for over a year now. While there is a lot of uncertainty as to how long it will last and how bad it will be, there are four things we know with certainty.
- There is no quick fix to the credit crisis.
- Central banks around the world will continue to inject liquidity into cash markets in order to keep the financial system functioning. But don't expect central banks to bail investors out of poor credit decisions.
- There will be less credit available and it will cost more.
- Higher lending rates across the globe will act as a handbrake on the global economy.