IN A shock move, central banks around the world launched co-ordinated interest rate cuts last night in an attempt to counter the global financial crisis as Britain pumped $1.3 trillion into its ailing bank system.
The US Federal Reserve, the European Central Bank, Bank of England and central banks in China, Sweden, Switzerland and Canada all joined the new interest rate offensive, cutting rates by half a percentage point, a day after the Reserve Bank cut its official cash rate by 1 percentage point to 6.0 per cent.
The banks said in a joint statement that they had co-operated in "unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets" during the crisis.
The move came as the International Monetary Fund warned there is a better than even chance the global economy will be in recession by Christmas.
It said the world faces its most serious financial shock since the Great Depression because the recession would coincide with the bursting of housing bubbles in many advanced economies.
In the past decade, Australian house prices had become overvalued by more than 20 per cent, the IMF said in its latest World Economic Outlook released overnight in Washington.
Fears of a global recession caused the Australian sharemarket to plummet 5 per cent yesterday to 4369.8 on the All Ordinaries. The Australian dollar sank to a five-year low of US67 cents amid expectations of more interest rate cuts and tumbling world commodity prices.
Last night the British Government unveiled a £500 billion rescue package for its battered financial industry, which will see the taxpayer take large stakes in the country's banks in return for a huge injection of money to prop up their shattered balance sheets.
The deal, announced by the Chancellor of the Exchequer, Alistair Darling, was a last-ditch effort to protect Britain's banks from a catastrophic collapse, following another day of hammering on the sharemarket.
The London market responded hesitantly with the FTSE index falling in early trading.
"The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s," the IMF report said.
For the first time, the IMF has forecast that the US and parts of Europe will probably go into recession - if they have not already - and that the downturn will continue until late next year.
Against this "exceptionally uncertain background", global growth projections for next year have been marked down from 3.9 per cent to 3 per cent, the slowest pace since 2002 when the world was coming out of the recession sparked by the dotcom bubble bursting. "Over the past year, the global economy has been buffeted by the deepening crisis in financial markets, by major corrections in housing markets in a number of advanced economies, and by a surge in commodity prices," it said.
The IMF calculated there was a 60 per cent chance of a global recession in the next three months, based on a number of leading indicators on commodity prices, US sharemarket returns and US industrial production.
The report identified Australia as one of just three countries to have experienced the "largest unexplained increases in house prices".
More than 20 per cent of the rise in the past decade could not be justified by rising incomes, employment levels and interest rates.
While noting that this could be due to country-specific issues such as immigration, the IMF said house prices in advanced economies could be expected to fall by an average of 25 per cent in the next two to four years.
Prices have already dropped by between 5 and 12 per cent in the first half of this year in Canada, Denmark, Spain, New Zealand and Britain.
The coincidence of slowing growth and bursting housing bubbles could create a toxic mix.
Recessions that coincided with a housing bust were one quarter longer, had a more severe impact on total output loss, and typically showed joblessness rising higher and for longer.
The IMF was a little more positive on Australia's prospects. It forecast gross domestic product growth of 2.5 per cent this year, falling to 2.2 per cent next year and with inflation moderating next year, although still outside the Reserve Bank's comfort zone of 2 to 3 per cent. Unemployment was expected to rise to 4.8 per cent next year.
Activity in Australia was likely to be held up by commodity prices. In the absence of another big downgrading of growth prospects, commodity prices were projected to stay high, the IMF said. The price of oil was expected to average about $100 a barrel next year.
The Treasurer, Wayne Swan, who flew to Washington last night to attend meetings of the IMF and World Bank, said the world was facing "one of the most significant upheavals in financial markets in recent history".
But he maintained Australia was well placed because "India and China are still expected to register strong growth".
with agencies
