By Scott Lanman Oct. 8 (Bloomberg) -- The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression. The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937; Japan's benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed's main rate doubled in two weeks to a record. ``Central banks of the world have finally woken up to the gravity of the current situation,'' Charles Diebel, head of European rates strategy at Nomura International Plc in London, wrote in a note. ``It is not potentially not the last we will see of central bank activity particularly in Europe as the macro situation is still weakening dramatically.'' Rate Levels The Fed reduced its benchmark rate to 1.5 percent. The ECB's main rate is now 3.75 percent; Canada's fell to 2.5 percent; the U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent. ``The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' according to a joint statement by the central banks. ``Some easing of global monetary conditions is therefore warranted.'' Global policy makers are reducing rates as economies weaken around the world. The International Monetary Fund said the global economy is heading for a recession in 2009 and increased its estimate of losses from the financial crisis to $1.4 trillion. The Fed's Open Market Committee, which voted unanimously for the move, said in its statement that ``incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending.'' Bernanke Message Today's move comes a day after Fed Chairman Ben S. Bernanke failed to assuage investors' concerns about the deteriorating economy by signaling he was ready to lower borrowing costs. Fed officials, who have kept their benchmark rate at 2 percent since April, may have wanted time for their record loans to the financial industry and new programs, including purchases of commercial paper, to bear fruit before lowering rates. Investors instead perceive the economic outlook deteriorating more rapidly, necessitating rate reductions. The Standard & Poor's 500 Stock Index slid 5.7 percent yesterday to 996.23, after a 3.9 percent slump the previous day. Futures on the S&P 500 rose today after the announcement, gaining 2.3 percent to 1,029.30. Europe's Dow Jones Stoxx 600 Index was down 0.7 percent after sliding 7.8 percent earlier in the day. The declines in U.S. shares the past two days followed pre- market opening announcements of fresh actions by the Fed to unblock credit markets. Stocks tumbled in Europe and Asia today and S&P 500 futures dropped 3.4 percent to 972 points. Fed Plans On Oct. 6, the U.S. central bank doubled its planned auctions of cash to banks to as much as $900 billion. Yesterday, it unveiled a unit to buy commercial paper, debt used by companies for short-term funding. Bernanke said in a speech yesterday that an intensifying credit crunch means officials must ``consider'' lowering borrowing costs. In more typical market conditions, stocks rally when a Fed chief indicates he'll reduce rates. Now, Bernanke's message may have less power because traders already anticipated for weeks that policy makers would need to make that move, and because of rising concern even rate cuts may do little to immediately help banks scrambling to reduce their vulnerability to loan losses. ``In normal times, a rate cut would have a positive effect,'' Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, said yesterday. ``What's troubling the market'' is concern about ``the solvency and losses of major institutions. The market is uneasy because it doesn't have a lot of information on what the depth of those losses will be.'' To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

Source