ECB:THE EUROPEAN Central Bank (ECB) yesterday announced the biggest interest rate cut in its 10-year history, slashing rates by 0.75 per cent, amid signs the euro zone is sinking deeper into recession.
Analysts are now predicting the rate might fall to about 1.5 per cent next year.
The latest rate cut, which was bigger than economists had forecast, takes the ECB's main refinancing rate down to 2.5 per cent and represents a number of firsts for the bank: the largest single rate reduction ever and the first time rates have been cut three months in a row. The three rate cuts since September are the steepest in such a short period.
Speaking after the meeting of the ECB's governing council, president Jean-Claude Trichet explained the bank's decision. "Since our last meeting, the evidence that inflationary pressures are diminishing further has increased," he said, adding that the decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity largely related to the global effects of financial turmoil.
Euro-zone inflation plunged by 1.1 percentage points in November, the biggest drop since the euro zone was created 10 years ago, to 2.1 per cent year-on-year. Mr Trichet pointed to slowing demand going forward. "Largely related to the effects of the intensification and broadening of the financial turmoil, both global demand and euro-area demand are likely to be dampened for a protracted period of time," he said.
Mr Trichet said the eventual decision had been reached by "consensus" rather than its usual unanimity. Some ECB governing council members fear sowing the seeds of the next crisis and of running out of ammunition to combat global economic turmoil.
Mr Trichet avoided offering any commitment to reduce euro-zone borrowing costs further
In Britain, the Bank of England took a similarly aggressive approach as it reduced rates by a full percentage point to 2 per cent, the lowest level since 1951, in an effort to shore up Britain's crumbling economy and head off deflation. British interest rates have never gone lower since the bank was created in 1694. The bank made it clear the downturn had gathered pace and conditions in credit markets remained difficult.
The Swedish Central Bank also cut interest rates by a record amount, reducing them by 175 basis points.
Expectations are that rates will fall to 1-1.5 per cent next year, as pressure continues to mount over the economic outlook, with Mr Trichet forecasting "global economic weakness and very sluggish domestic demand persisting in the next few quarters".
AIB is forecasting two further cuts in rates of half a percentage point in the months ahead, taking ECB rates down to 1.5 per cent, "if not lower", in 2009, while Citigroup expects rate cuts to continue in February, falling to 1 per cent, or even lower, by the middle of next year. - (Additional reporting Financial Times service/Reuters)
