Europe cuts rates to historic lows amid deepening recession

March 5th, 2009 - 8:31 pm ICT by IANS  

Frankfurt, March 5 (DPA) The European Central Bank (ECB) cut rates for the fifth time in six months Thursday lowering borrowing costs to an historic low as the Frankfurt-based ECB stepped up efforts to contain the economic fallout from the deepening global recession.
Thursday’s hefty 50-basis-point reduction brought the ECB’s benchmark refinancing rate down to 1.5 percent and followed an announcement in London that the Bank of England (BoE) meeting had also trimmed the cost of money by 50 basis points.

However, with Thursday’s ECB interest rate cut widely expected the market focus is now likely to be on the press conference later Thursday from bank chief Jean-Claude Trichet for signs as to whether the ECB plans to press on with its rate-cutting cycle in the coming months.

Many analysts believe that the ECB will lop another 50 basis points off rates in the 16-member eurozone by the middle of the year. This would bring the refinancing rate down to just one percent.

Moreover with the ECB having slashed rates by 225 basis points since October, the markets are also waiting for any hints from Trichet that the bank has softened its stance reverting to other non-interest rate instruments to help spur economic growth.

Meanwhile, dwindling inflation and a steady stream of bleak economic news are helping to lay the foundations for Thursday’s rate cut.

At the same time, another round of grim earning results from leading banks and financial houses have sparked renewed concerns about the state of the global financial sector.

The International Monetary Fund predicts the eurozone economic growth will slump by two percent in the wake of the global downturn, which was triggered by a crisis in the US banking business.

Economic confidence in the eurozone plunged to an historic low last month, the European Commission’s (executive body of the European Union) closely watched economic sentiment indicator released last week showed, while unemployment climbed to 28-month high of 8.2 percent in January.

Despite February’s unexpected tick up in the eurozone’s annual inflation rate to 1.2 percent, consumer prices remain well below the ECB’s two-percent inflation target.

But further highlighting the current economic gloom, Thursday’s ECB rate decision is likely to be accompanied by the bank slashing its inflation and economic growth predictions issued just three months ago.

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