Central bankers need to cut rates soon, says BCA Research.

In a research note published today, BCA warns that central bankers shouldn’t be sleeping soundly. “Last week’s financial market rioting sent a strong message to the Fed and other central banks that policymakers cannot wait to see spillover effects of tighter credit conditions on the economy,” it says. “Quality spreads have soared and bid/ask spreads have blown out around the world.”

“In Europe, it is alarming that interbank dealing in covered bonds came to a halt last week and planned high-quality debt issuance was cancelled,” BCA adds.

“Measures of banking sector risk have exploded and liquidity in interbank money markets is deteriorating again,” it notes, pointing out that interbank lending is the main channel through which central banks affect financial markets and the economy.

“Policymakers cannot allow these markets to stay moribund for long because it might mean that interest rate cuts become impotent,” it concludes. “The Fed needs to cut interest rates promptly, and pressure is building on other central banks to follow suit.”