As we see yet another trimming of US interest rates many people are starting to ask whether this is the correct course of action to try and re-inflate the money markets around the world. While central banks around the world have either reduced rates, or are pondering imminent reductions, the credit crunch crisis is getting worse. In the UK we have seen the likes of Egg recall up to 160,000 of their credit cards to reduce the chances of default and we are seeing thousands of US citizens at serious risk of losing their homes. Is the interest rate option really the only one open?

The main benefit of falling interest rates is to reduce the cost of debt and try to bail out the business sector, which is after all the heart beat of any economy. Historically, interest rate changes take anything up to a year to have the desired effect but it is really the first stage in a long term recovery process. In the short term the more prominent affect of falling interest rates is usually an increase or stabilisation of the level of confidence in the economy. However, the credit crunch is something that very few people have experienced and is a real one-off situation. We have been through vaguely similar situations but on a much lighter scale, and ones which have been rectified with a few calming words from the worlds central banks and interest rate reductions.

In order for the world wide economy to pick up we need to see confidence returning to both the credit market and worldwide business arena. The stock markets around the world are crying out for good news but of late it has all been doom and gloom. Exactly when confidence in the worldwide economy will pick up is anyone’s guess, but while interest rates are part of the solution, the days of simply indicating a change in interest rate policy to “fix” the economy have gone.

Confidence is the name of the game and until we see signs that the worldwide economy has “bottomed out”, we may well be in for a whole lot more bad news before is gets better.