Bank of England, ECB slash interest rates - FRANKFURT
(FRANKFURT) The European Central Bank slashed interest rates by 50 basis points yesterday, hoping to breathe life into the eurozone economy as it faces its first recession.
The widely expected cut took the ECB’s benchmark rate to a two-year low of 3.25 per cent, reflecting the eurozone’s sharply deteriorating economic outlook and easing inflation pressures.
Shortly before the ECB’s decision, the Bank of England - faced with a slumping housing market, a decline in manufacturing and higher unemployment - astonished analysts by announcing a hefty 1.5 percentage point cut, the biggest since the bank gained independence to set rates 11 years ago and a mark of the gravity of concern over the economy.
Heavy US job losses, a sharp decline in the world services sector and bleak corporate outlook painted an increasingly dark picture this week.
Matthew Sharratt, UK economist at Bank of America, echoed widespread sentiment in calling the British cut ‘astonishing’. Jonathan Loynes of Capital Economics called it ’spectacular’.
‘There is still more to do,’ Mr Loynes said. ‘At 3 per cent, UK interest rates are still well above US ones when economic conditions suggest they should be as low if not lower . . . Our view remains that UK rates will fall to one per cent or below.’
Last month, the Bank of England joined forces with the US Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates.
All 81 economists polled by Reuters last week had expected the ECB’s 50 basis point rate cut, as easing inflation pressures mean that the ECB faces fewer problems reaching its goal of annual inflation just below 2 per cent.
The 15-nation eurozone’s economy, which had grown steadily since the bloc’s creation in 1999, contracted by 0.2 per cent in the second quarter this year and most economists expect further shrinkage in third-quarter GDP figures due on Nov 14.
However, rate cuts may be less effective than in the past, as banks are still wary of extending loans and are reluctant to pass interest rate cuts on to borrowers.
However, the sheer scale of yesterday’s cut will put pressure on British banks to conform and back smaller businesses, some of which are facing bankruptcy.
The Swiss national bank had also cut its rates by 50 basis points. — Reuters
Source : Business Times - 07 Nov 2008
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