The Bank of England (BoE) announced a dramatic rate cut of 1.5 percentage points to 3% yesterday to address a “sharp downturn in the economy”. The European Central Bank (ECB) followed shortly afterwards, with a rate cut of half a percentage point to 3.25%, and refused to rule out further cuts in December.
Central banks in Denmark and Switzerland also cut interest rates by 50 basis points, while the Czech Republic announced a reduction of 75bp.
The impact was immediate in the UK, where overnight sterling Libor fell from 4% to 3.21%, and three-month sterling dropped over one percentage point, from 5.56% to 4.5%.
Reactions to the ECB’s actions have been more tempered. Overnight euro Libor decreased from 3.46% to 3.43% today, while three-month borrowing rates fell to 4.47% from 4.60% yesterday.
European equity markets saw slight increases this morning. As of 1255 GMT, London’s FTSE 100 index was up 1.22% to 4324.73, Paris’ Cac 40 index climbed 1.2% to 3391.42, and Frankfurt’s Dax index stood at 4816.95, a gain of 0.07%.
In the US, where the Federal Reserve cut its benchmark federal funds by 50bp last week, overnight dollar Libor remained stable at 0.33% and three month dollar Libor dropped to 2.29% from 2.39% yesterday.
As of 1230 GMT, the Ted spread, which tracks the difference between three-month Libor and treasury bills, stood at 1.99%, down from 2.08% at the close of trading yesterday.
The Chicago Board Options Exchange Volatility Index (Vix), which measures the implied volatility of S&P 500 index options, closed at 63.68 yesterday, up from a close of 54.56 on Wednesday.
The S&P 500 index dropped from 1005.75 at the close of trading on Tuesday to 904.88 last night, a fall of 10.03%.
In the Asian markets, the Hang Seng index increased by 3.29% from Thursday's close to reach 14243.43 at the end of Friday, while Japan’s Nikkei 225 fell 3.55% to 8583.
See also: BoE announces 1.5% rate cut