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Global shares recover driven by rate cut hopes

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by Kay Mitchell

It is believed that the US Federal Reserve will cut interest rates this week, which has boosted shares worldwide following a severe decline earlier this week on fears of a global recession.

The Fed is widely expected to cut rates by half a percentage point to 1%. This resulted in a sharp rise on Wall Street after the Dow Jones rose by 889.35 points to 9,065 yesterday – the second biggest one-day gain.

As at Monday, 27 October, the Dow Jones had lost 25% during the month.

This, in turn, lifted Japan’s Nikkei index, which ended on Wednesday up 7.7%, with confidence also boosted by hopes of a rate cut in Tokyo.

Meanwhile, analysts believe that the Bank of England and European Central Bank will follow suit next week.

UK interest rates currently stand at 4.5% after the Bank of England cut them by 0.5% earlier this month in a co-ordinated move with the European Central Bank (ECB). Currently, the ECB’s interest rate for the eurozone is at 3.75%.

The last time the Bank of England cut rates by half a percentage point was in November 2001, in the aftermath of the September 11 terrorist attacks.

According to Howard Archer of Global Insight, it is likely that the Bank of England could slash interest rates by as much as one percentage point to 3.5%. Many economists believe that interest rates could fall as low as 2% next year in an attempt to boost the economy.

Meanwhile, in London, the FTSE 100 index soared by 219 points in the first minutes of trading today, a 5.5% gain, reaching 4145.89, while at 10:00 GMT, France’s Cac gained 183 points to 3,298.

In stark contrast, Iceland’s central bank raised interest rates yesterday by a whopping 6% just two weeks after it cut rates from 15.5%.

According to the Central Bank’s governor, David Oddsson, the rise is intended to be only for the short-term to stabilise the currency, the krona. He added it is also in line with its agreement with the International Monetary Fund (IMF), after it secured an emergency loan of $2 billion (£1.3 billion) on Monday.

In the meantime, the latest country to receive a rescue package is Hungary, which has been loaned $25 billion (£15.6 billion) by the IMF, the EU and the World Bank.

Hungary’s economy has suffered because its banking system was heavily exposed to foreign financing at a time when investors were withdrawing from emerging economies.

The IMF is also in negotiations with Belarus and Pakistan with regard to emergency loans to see them through the crisis.

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News posted: October 29, 2008

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