Thursday February 5, 07:18 AM
TOPWRAP 2-UK set to cut rates; BOJ warns may need to do more
By Alex Richardson
SINGAPORE, Feb 5 (Reuters) - The Bank (NASDAQ: TBHS - news) of England was set to cut record low interest rates yet further on Thursday and a central banker in Japan, where rates are already near-zero, warned of the need for unconventional policy moves to stave off the global crisis.
As glum earnings from Deutsche Bank (Xetra: DBK.DE - news) and U.S. corporate stalwarts such as Kraft Foods (NYSE: KFT - news) stoked fears of deepening recession, the U.S. Senate voted to soften a 'Buy American' clause in a $900 billion stimulus plan that President Barack Obama said could spark a trade war.
Governments and policymakers worldwide are scrambling for measures to ease the pain of the worst financial crisis in more than 60 years as consumption falls and unemployment rises.
'It's not too much to say falling exports are triggering a downward spiral of production, incomes and spending, and it looks as if the Japanese economy is in a hard landing,' said Atsushi Mizuno, who sits on the Bank of Japan's rate setting policy board.
'The Bank of Japan should be prepared to act promptly, including taking measures that could be considered unconventional in normal times.'
A financial crisis that began with a collapse in risky U.S. home loans, devastating the banking sector, has pushed the United States, the euro zone, Britain and Japan into recession.
RATE CUTS
In response, policy makers have cut interest rates sharply in an effort to stimulate demand and get credit flowing again. Official rates in Japan and the United States are close to zero.
In Britain, the Bank of England was expected to cut its benchmark interest rate -- already at a record low 1.5 percent -- by at least another 50 basis points. Some analysts polled by Reuters predict an even bigger cut.
The International Monetary Fund has predicted the British economy, heavily dependent on the ravaged financial sector, could be the worst-hit in the industrialised world, shrinking by 2.8 percent in 2009.
'The economy is in deep recession and ITEM believes that interest rates should fall further -- possibly to zero,' said Andy Goodwin, senior economic adviser to the Ernst and Young ITEM Club, a forecasting group.
The European Central Bank, which also reviews policy later on Thursday, was expected to leave its key rate untouched at 2 percent after four months of cuts. But financial markets will look for signals of what further steps it might take to shore up the euro zone economy.
A cut in Russia's sovereign debt rating underscored worries that a sharp downturn in Eastern Europe could add another weight to the euro zone economy and sent the single currency sliding on Wednesday, although it steadied on Thursday ahead of the rate decision.
Western European banks lent heavily to Russia and other eastern European countries and Russia was a big buyer of euro zone exports when oil prices were high.
PROFIT FORECASTS
Deutsche Bank predicted a bleak future for the global economy as it reported a 2008 pretax loss of 5.7 billion euros on heavy writedowns and a slump in revenues from debt trading and other products.
'Looking forward, we see continuing very difficult conditions for the global economy, posing significant challenges for our clients and for our industry,' Chief Executive Josef Ackermann said.
Underlining the depth of the downturn in the world's biggest economy, Kraft and Sara Lee Corp (NYSE: SLE - news) cut their profit forecasts for the year on Wednesday, as consumers turned to lower priced competitors. Their shares fell sharply.
'Consumer spending is the lion's share of the economy,' said Anthony Conroy, head trader for BNY ConvergEx in New York. 'When consumers stop spending, the economy comes to a halt.'
After U.S. markets closed, technology bellwether Cisco Systems (NASDAQ: CSCO - news) forecast a slide of as much as 20 percent in its current quarter revenue and said it would cut up to 2,000 jobs
China's Lenovo, the world's fourth-biggest personal computer maker, posted its first net loss in nearly three years, which was worse than expected, as earnings were hit by weakening global demand.
The U.S. private sector cut more than half a million jobs in January, a report from ADP Employer Services said on Wednesday. Although steep, the figure, which precedes more comprehensive official data on Friday, was below December's 659,000 and slightly lower than had been expected.
In Australia, investment bank Macquarie Group warned its profit would fall 50 percent this year, the first decline in 17 years, due to writedowns. But its shares rose on relief operations had not deteriorated as much as expected.
Japanese stocks fell more than 1 percent in the face of the gloom from the United States. But shares in Hong Kong and Shanghai gained on hopes the Chinese economy would avoid a severe downturn.
'BUY AMERICAN'
In the United States, where a mammoth stimulus bill is expected to be pushed through the Senate this week, lawmakers approved an amendment requiring the 'Buy American' provisions be 'applied in a manner consistent with U.S. obligations under international agreements'.
The change gives Canada, Mexico, the European Union and certain other major trading partners some comfort they would be exempted from a strict requirement in the bill that all public works projects funded by the stimulus package use only U.S.-made iron, steel and manufactured goods.
'The Buy American provisions ... have echoes of the disastrous Smoot-Hawley tariff act,' said Republican Senator and defeated presidential candidate John McCain, referring to 1930s legislation often blamed for prolonging the Great Depression.
'It sends a message to the world that the United States is going back to protectionism.'
(Additional reporting by Reuters bureaus) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http:/topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http:/topnews.reuters.com) Keywords: FINANCIAL/
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