US sliding into recession?

There are new signs that interest rates in the US could fall in order to offset the negative impact from the credit crunch and sub-prime mortgage market crisis. US Federal Reserve chairman, Ben Bernanke, says the central bank would consider the “timeliest indicators” and the broad economic effects of instability in financial markets when determining rates.

Economists immediately saw this as suggesting that rates would be cut by 0.25% to 5%. President George Bush also warned that although his Government will guarantee the loans of low to middle income borrowers who are behind on their repayments, there is more weakness in the US housing market.

Meanwhile The Economist Intelligence Unit has warned that the fall-out from the sub-prime mortgage crisis could cause the US to fall into a recession with “devastating effects on the world economy.

It says there are three ways it will have an impact – the direct effect on the holders of the sub-prime assets, the credit crunch that has been caused by the uncertainty over who is directly involved on the crisis, and repricing of risky assets.

The report gives the US a 30% chance of sliding into a recession and adds that Australia is one of three countries at the highest risk of following the US into a housing slump. The report says the world economy is suffering from one of the biggest asset bubbles in history.

And more signs of the flow-on affect from the credit crunch crisis as Europe’s major central banks meet this week to examines their rates.

Amanda Gome