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WORLD> Europe
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European central banks slash interest rates to tackle recession
(Agencies)
Updated: 2008-12-05 08:23 BRUSSELS – Leading European central banks took historic action Thursday to ward off spreading recessions, slashing their key lending rates to boost businesses and consumers. The European Central Bank cut the benchmark cost of borrowing by a record 0.75 percentage points to 2.50 percent as the 15-nation eurozone faced its first recession.
ECB president Jean-Claude Trichet acknowledged here that his bank's staff expected the eurozone economy to shrink by 0.5 percent next year and that the contraction could reach 1.0 percent. In September, the bank had forecast 2009 growth of 1.2 percent but "on the basis of our current analysis and assessment we see global economic weakness and very sluggish domestic demand persisting in the next few quarters," Trichet said. The eurozone economy contracted in the second and third quarters of 2008, the technical definition of recession. For the ECB , it was also an unprecedented third rate cut in two months, following a coordinated reduction with other central banks on October 8 and another move in early November. "The ECB has come a long way," Bank of America senior economist Holger Schmieding said, adding that rates could be lowered much further if data pointed to a continued recession in the coming months. "It strengthens our hope that if the data indeed turn further south, the ECB will ease its policy further in an undogmatic fashion to a trough of 1.5 percent." In Stockholm, the Swedish central bank set the tone early in the day by nearly halving its key rate with a cut of 1.75 percentage points to 2.0 percent to "dampen the fall in production and employment" due to the global financial crisis. The Danish central bank also cut its key interest rate by 0.75 percentage points to 4.25 percent in line with the ECB move. But in London, BGC Partners senior strategist Howard Wheeldon questioned whether the rate cuts would spur a rapid return to economic growth and concluded: "Chances are they won't. "Indeed, even if rates eventually came down to zero, one is still left with the nagging doubt that even this would fail to create an environment that encourages companies to kick start investment." Repeated and sharp central bank cuts have failed to unfreeze the interbank lending crucial to business that ground to a halt after the US market for high-risk or subprime mortgages collapsed in mid-2007. Trichet called attention to the bank's readiness to cut rates substantially and pressed markets to do their part. "We have decreased rates by 175 basis points (1.75 percentage points) over a very, very short period of time," Trichet said. Bank of America economist Gilles Moec told AFP the decision signalled that "the best course of action is to go fast and deep, probably on the condition that the relaxation will be quickly taken back as soon as the first signs of recovery appear." The ECB still has ample room for manoeuvre with inflation falling from a record 4.0 percent in July to 2.1 percent last month. It is forecast to drop further as oil and food prices decrease. The ECB's medium-term inflation target is just below 2.0 percent and Trichet downplayed speculation the eurozone was falling into a dangerous deflationary spiral of falling prices and output. "I do not consider at the moment I am speaking ... that we are in the presence of a deflationist phenomenon," Trichet said. But he refused to be drawn out on whether the ECB's next rate cut would come as early as next month. "For January I say nothing. As simple as that," Trichet said. ECB staff forecasts for growth and inflation were also released on Thursday, estimating the economy would grow 1.0 percent this year before slowing sharply next year. For 2010, growth was put at 1.0 percent. Inflation was expected at 3.3 percent this year, before falling to 1.4 percent in 2009 -- compared with an earlier 2009 estimate of 2.6 percent -- and then edging back up to 1.8 percent in 2010. |
