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Business

ECB makes history with 0.75% interest rate cut

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Latest update : 2008-12-04

As European economies slip one after the other into recession, the European Central Bank announced its biggest interest rate cut yet, down 0.75 percentage points to 2.50%. Earlier, the Bank of England lowered its key rate to pre-World War II levels.

AFP - European central banks took bold action Thursday to ward off a looming recession, slashing their benchmark lending rates to boost business investment and household spending.
  
The ECB cut the cost of borrowing in the 15-nation eurozone by a historic 0.75 percentage points to 2.50 percent as the eurozone faced its first recession, after the Bank of England had slashed its main rate by a full point to 2.0 percent.
  
For the ECB it was also an unprecedented third rate cut in two months, following a coordinated cut with other central banks on October 8 and another reduction in early November.
  
In Stockholm, the Swedish central bank had set the tone early in the day by nearly halving its key rate by 1.75 percentage points to 2.0 percent to "dampen the fall in production and employment" due to the global financial crisis.
  
"The fact that the interest rate needs to be cut substantially is also due to monetary policy not having such a large impact recently as it normally does," the bank said in a statement. Sweden is in the EU not not the eurozone.
  
Repeated and sharp central bank cuts have failed so far to unfreeze crucial interbank lending that ground to a halt after the US market for high-risk or subprime mortgages collapsed in mid 2007.
  
In Frankfurt, the ECB said on Thursday that it had also cut two other benchmark rates, the marginal lending rate and the deposit facility rate, by the same amount to 3.0 percent and 2.0 percent, respectively.
  
ECB officials had suggested last week they did not want to use up all their rate cutting options too quickly in case the recession drags on, and markets had anticipated a half point cut.
  
The bank was accused of excessive caution last month when its decrease of the same amount was overshadowed by a surprise BoE cut of three times as much.
  
The ECB still has ample room for manoeuvre with inflation falling from a record 4.0 percent in July to 2.1 percent last month. It is forecast to drop further as oil and food prices decrease.
  
The bank's medium term inflation target is just below 2.0 percent.
  
Analysts suggest it could slash its benchmark lending rate to as low as 1.5 percent by March to boost the eurozone economy, which contracted in the second and third quarters and is expected to keep shrinking well into 2009.
  
European Union data confirmed Thursday that the eurozone economy was in its first official recession since the bloc was formed in 1999.
  
BNP Paribas economist Clemente De Lucia noted that "leading indicators of momentum in activity reported that bigger gross domestic product falls are likely in the coming quarters."
  
She said that "growth concerns are mounting" in particular because "the GDP breakdown reported that the weakness was broad-based."
  
The economy of 320 million people is set to expand to 16 members and add another 5.5 million inhabitants when Slovakia joins in January.
  
ECB forecasts for growth and inflation are also to be released here later on Thursday, as the ECB governing council holds one of two annual meetings in a eurozone capital.
  
During a press conference at which Trichet is to explain the bank's decision, analysts will listen for indications of whether the ECB was inclined to cut rates again in the near future.

Date created : 2008-12-04

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