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ECB expected to cut interest rates

Text by AFP

Latest update : 2008-11-06

The European Central Bank is expected to cut interest rates by half a percentage point in an attempt to spur an economic recovery following European Commission warnings that the eurozone is facing its first recession.

The European Central Bank was expected to cut its main lending rate sharply on Thursday to boost weak eurozone economic activity.
   
ECB governing council members are widely expected to reduce the standard interest rate by a half percentage point to 3.25 percent.
   
The level serves as a benchmark for lending by commercial banks to businesses and households throughout the 15-nation eurozone.
   
On October 8, the ECB cut its rate by a half a percentage point in an exceptional coordinated move with the US Federal Reserve and five other central banks to boost battered financial markets.
   
"A cut seems unavoidable," UBS economist Amit Kara said on Wednesday.
   
ECB president Jean-Claude Trichet said last week that one was "possible" but not certain. Markets nonetheless quickly priced in lower rates.
   
The decision is to be announced here at 1:45 pm local time (1245 GMT) and Trichet is to give a press conference 45 minutes later to explain the bank's decision and provide guidance on its outlook for the coming months.
   
Inflation, the bank's main concern, is still high at 3.2 percent but is falling quickly towards the ECB target of just below 2.0 percent owing to the sharp economic slowdown that has cut demand for products like crude oil.
   
"Inflation may go down to below 2.5 percent by year end," Natixis economist Ceric Thillier forecast.
   
Meanwhile, the European Commission has warned that the worst financial crisis for generations has pushed the eurozone economy into its first technical recession -- two successive quarters of economic contraction -- since the bloc was formed in 1999.
   
ECB officials are clearly aware of the threat, with chief economist Juergen Stark saying Wednesday that "we cannot compare the current situation with past recessions, it is more serious this time."
   
"Banking sector problems have dramatic consequences that we will have to confront for years," Stark added.
   
That suggests that the ECB's rate cutting cycle might be a deep one.
   
"It could be quite agressive," Thellier said. Growth prospects are bleak, inflation expectations have diminished significantly and the unemployment rate will likely rise in 2009.
   
Most analysts expected more rate cuts, perhaps as early as December, and saw the key lending rate falling to 2.0 or 2.5 percent by mid 2009.

Date created : 2008-11-06

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