Australia cut interest rates sharply on Tuesday, presaging likely reductions in Europe later this week, and evidence of recession mounted despite glimmers of hope from major banks. For investors, the worst financial crisis in 80 years has all but eclipsed Tuesday's US presidential election although the result may offer some market relief with the promise of more fiscal stimulus. Whether Democrat Barack Obama or Republican John McCain wins, he will face a huge challenge in reviving the world's largest economy, which is already contracting. Australia's bigger-than-expected 75 basis point rate cut followed cuts in the United States, China and Japan last week. Britain and the euro zone are expected to follow suit on Thursday with half point reductions, or maybe more. The recession that central banks and governments around the world have tried to ward off with trillions of dollars in bank bailouts, liquidity pumped into frozen money markets and economic pump-priming measures, looms ever larger. The Australian central bank said there was “significant weakness” in major industrial economies in explaining why it cut rates to 5.25 percent, the lowest since March 2005. “Each of the big developed economies now is either in a severe recession or well on the way,” said Rory Robertson, interest rate strategist at Macquarie in Sydney. There were glimmers of better news from banks. UBS AG, one of Europe's hardest-hit banks, said accounting effects would weigh on fourth quarter results but it had seen some encouraging signs in client flows in October. Royal Bank of Scotland, which is taking 20 billion pounds of emergency UK government funds, reported a lower-than-expected write-down of 206 million pounds ($334 million) for toxic assets in the third quarter, although it said tough markets would have an adverse effect on full-year results. Money market rates declined in Asia, indicating a gradual easing in the strains of the credit crisis. But analysts said that still reflected central bank efforts to add liquidity rather than commercial banks lending to each other. The credit crunch, which stemmed from a collapse in the US housing market, has prompted banks to clam up on lending to each other, businesses and households for over a year now. Synchronized rate cuts by central banks and emergency government packages worth some $4 trillion may have prevented a banking sector meltdown but the world economy is in poor shape.
