Central banks try to balance inflation

The world's major central banks face the delicate balancing act of trying to ease the global credit crunch sparked by the US subprime home loan crisis while trying to rein in rising inflation.
In a move analysts described as the most concerted effort since the September 11, 2001 terror attacks, the US Federal Reserve and four other central banks said Thursday they would make tens of billions of dollars available to cash-starved international banks.
The massive rescue effort came amid concerns about the widening credit crunch, in which commercial banks are curbing lending to their peers and thus threatening to crimp global economic growth.
"The banks wanted to send a strong message to say 'we're there' even if we can't bring down interest rates because of inflation," said Olivier Gasnier of Societe Generale.
Central banks, whose role it is to keep prices stable, are battling with inflationary pressures that are among the most serious in more than a decade while at the same time fighting the credit crunch sparked by the subprime crisis that has persisted since August.
Such a combination of problems is unprecedented, said Gasnier.
In previous global financial crises, particularly the dotcom bust in 2001, central banks were able to significantly lower interest rates to boost the economy.
The Fed did that in the wake of the September 11, 2001 terror attacks.
But today, with inflation at 3.5 percent in the United States and 3.0 percent and rising in the eurozone, radically cutting rates is not an option.
Thus the Fed cut its rate for the third time since September on Tuesday by a cautious quarter-point to 4.25 percent in a move that notably failed to dispel jitters about the outlook for the US economy.
Stock markets tumbled after the announcement.
The situation for credit markets has continued to worsen in recent months, with the cost of money rising well above base lending rates.
The one-month and three-month Euribor interbank rates were Thursday at around 4.95 percent, when in normal circumstances they hover between 4.20 and 4.25 percent compared with the eurozone base rate of 4.00 percent.
That is another sign of persistent fears among investors about banks' exposure to the subprime crisis.
A fresh wave of bank earnings statements -- led by Lehman Brothers -- due this week are making them even more nervous.