Credit stress recedes as focus turns to rate cuts

By Jamie McGeever and Richard Leong

LONDON/NEW YORK (Reuters) - Banks trimmed the rates of interest at which they lend to each other on Wednesday, with three-month rates falling to the lowest in about a month, suggesting central banks have gained the upper hand in their fight against the global credit crunch.

Unprecedented efforts by monetary authorities have unlocked credits for cash-strapped borrowers but this could be negated by a global slowdown, which could force central banks to cut rates further to stimulate credit and growth, analysts said.

Also on Wednesday, emerging markets were roiled by intense selling as governments from Hungary to Pakistan enacted measures to defend their currency or sought credit relief.

"You have two variables going in opposite directions: You are seeing credit risks heading lower. But people are not feeling good about the world, and the focus is shifting there," said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto.

In response to a weakening domestic economy, the Bank of Canada on Tuesday trimmed its key rate by a quarter percentage point to 2.25 percent and left the door open for further cuts.

Traders raised their bets that the U.S. Federal Reserve will slash its rate target by half a point to 1.00 percent after the central bank's two-day policy meeting next week, judging by interest rate futures.

On the other side of the Atlantic, Bank of England Governor Mervyn King said late Tuesday Britain's economy is probably entering its first recession in 16 years. This left the impression the BoE may pare rates further after a half-point move earlier this month.

Global equities sold off heavily worldwide on Wednesday, as did emerging markets assets, a reminder that the financial crisis may be past the critical stage but is not over.