Europe’s leading banks to cut interest rates to historic lows

March 5th, 2009 - 12:11 pm ICT by IANS  

Berlin/London, March 5 (DPA) Europe’s two leading central banks are expected to deliver another round of hefty 50-basis points cuts in interest rates Thursday amid signs of the deepening global recession.
While the European Central Bank (ECB) meeting in Frankfurt is forecast to cut its benchmark refinancing rate to 1.5 percent, the Bank of England (BoE) meeting in London is predicted to trim borrowing costs in Britain to just 0.5 percent.

This will bring rates in the 16-member eurozone down to the lowest level in the ECB’s ten-year history with the Frankfurt-based bank having slashed rates by 225 basis points since October as part of moves to spur economic growth.

The fall in British interest rates has been even more dramatic. Borrowing costs in Britain stood at 5 percent in October and at 1 percent are already at their lowest level in the BoE’s more than 300-year history.

With interest rates approaching zero, the British government is expected Thursday to also give its formal approval to launch the process of so-called quantitative easing, a series of measures to inject cash into the banking system to help kickstart the economy.

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

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

The International Monetary Fund predicts the British economy will contract by 2.8 percent in 2008 and eurozone economic growth will slump by 2 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 a historic low last month, the European Commission’s closely watched economic sentiment indicator released last week showed while unemployment climbed to a 28-month high of 8.2 percent in January.

But the BoE’s latest Inflation Report has warned that if monetary policy was not loosened further in Britain gross domestic product would shrink by between 3 percent and 3.7 percent next year.

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 inflation target of “close to but below” 2 percent.

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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