European Central Bank cuts interest rates

December 5th, 2008 - 2:56 am ICT by IANS  

Brussels, Dec 5 (DPA) The European Central Bank (ECB) delivered an historic 75 basis points rate cut Thursday. But ECB chief Jean-Claude Trichet warned that the bank might not be in a rush to lower rates again, despite a rapid deterioration in Europe’s economy.Speaking at a press conference following a meeting of the bank’s 21-member rate-setting council in Brussels, Trichet said the bank now wanted to sit back and assess the economic impact of the cuts - totalling 175 basis points - it has delivered since October.

“We have to concentrate on getting what has been decided operational,” said Trichet.

Thursday’s 75-basis-points reduction was the biggest rate cut since the notoriously cautious ECB took charge of eurozone monetary policy about ten years ago and brought borrowing costs in the currency bloc down to 2.5 percent.

But with the ECB having cuts rates three times in as many months, Trichet said the bank now had to ensure that the reductions were “effective in going through the various channels to the world economy.” Nevertheless, as he released the ECB’s staff projections for inflation and economic growth, Trichet said inflation was diminishing and warned that the 15-member eurozone faced a protracted downturn.

There had been “an intensifying and broadening of the financial turmoil” which has hit the global economy, Trichet said.

Indeed, the staff projections underscored how the economic slump in the eurozone has worsened since the release of the last projections in September, with the figures showing growth coming to a halt next year and inflation plunging to below the ECB’s annual target of close to, but under, 2 percent.

Instead of growing by 1.2 percent as set out in the September staff projections, the eurozone economy is now likely to contract by 0.5 percent.

Growth should then gain ground again in 2010, coming in at between 0.5 percent or 1.5 percent. The midway point is a meagre 1 percent growth rate.

Data released last week showed annual eurozone inflation chalking up its biggest fall in almost 20 years in November to drop to a lower-than-forecast 2.1 percent from 3.2 percent in October.

As a result, Thursday’s staff projections show annual eurozone inflation falling to 1.4 percent in 2009 before edging up to 1.8 per cent in 2010. In September, the staff projections had forecast a 2.6- per-cent inflation rate for next year.

Convening in Brussels at one of its regular out-of-town meetings, the Frankfurt-based ECB’s announcement followed the decision by the Bank of England (BoE) to lop another 100 basis points off UK rates and Sweden’s national bank’s move to slash rates by 175 basis points.

Thursday’s announcement by the BoE’s nine-member monetary policy committee brought British rates down to 2 percent, their lowest since 1951. It also came in the wake of the London-based central bank’s decision to cut rates four weeks ago by a hefty 150-basis- points.

Faced with rapidly slowing economic growth, central banks have stepped up moves to cut the cost of borrowing.

The US key interest rate now stands at 1 percent, after the Federal Reserve reduced the cost of borrowing in the world’s biggest economy by 325 points this year in a series of rapid-fire cuts.

Meanwhile, China has delivered the biggest reduction in borrowing costs in the country since the Asian financial crisis a decade ago. Australia’s Reserve Bank this week announcing its fourth rate cut in as many months.

At the same time, Switzerland’s normally conservative national bank last month chopped 100 basis points off rates.

Economists had been divided in the run-up to Thursday’s ECB meeting on the size of the reduction with some believing that slumping economic growth and dwindling inflation would result in the bank slashing rates by even 100 basis points.

However, the majority of economists had predicted that the ECB would stick to past practice and not reduce borrowing costs by more than 50 basis points at one meeting.

But Thursday’s ECB rate decision followed a slew of grim indicators, which have raised fears that the 15-member eurozone could be heading for a protracted economic downturn.

“The recession in the eurozone seems to worsen by the day, while at the same time inflation is no longer a concern,” said ING economist Carsten Brzeski.

Economic sentiment in the eurozone tumbled to a 15-year low in November, a key survey released last week showed, after the currency bloc tipped into recession in the third quarter.

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