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European central banks cut rates to ward off recession - Update


Published :
Thu, 06 Nov 2008 09:39
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London/Frankfurt - Faced with a looming recession and rapidly falling inflation, the European Central Bank (ECB) cut rates by 50 per cent Thursday as monetary authorities around the world step up efforts to cut the cost of money. The ECB's move followed the Bank of England's (BoE) dramatic announcement that it was slashing rates by 1.5 per cent.

The BoE's more-than-forecast cut underscored the speed of the economic deterioration threatening Britain with the most aggressive forecasts for the British central bank to cut by 100-basis-points.

Thursday's cuts in borrowing costs brought the rates in the 15-member eurozone down to 3.25 per cent and to 3 per cent in Britain.

The ECB has now slashed rates by 100 basis points in just four weeks, while the BoE has trimmed rates by 250 basis points in a month.

Analysts expect both banks to follow up Thursday's cuts with more reductions in borrowing costs in the coming months and predict that rates could be as low as 2 per cent by the middle of next year.

The global drive to lower rates also forms part of the build-up to a meeting of European Union leaders in Brussels Friday and a larger gathering of the Group of 20 government chiefs in Washington a week to discuss measures for dealing with the global financial crisis.

Indeed, this week's ECB and BoE reductions also come in the wake of new wave of rate cuts around the world lead by the US Federal Reserve and the Bank of Japan.

The monetary authorities in Norway, Slovakia, the Czech Republic, South Korea, Taiwan, Israel and China have also reduced the cost of money in the run-up to Thursday's BoE's nine-member monetary committee meeting in London and the ECB's 21-head governing council gathering in Frankfurt.

On Tuesday, Australia's Reserve Bank delivered its third rate cut in as many months slashing rates by a hefty 75 basis points.

More to the point, the gloomy global economic outlook and falling inflation is giving the central banks around the world room to move on borrowing costs.

Eurozone inflation slipped to 3.2 per cent in October from 3.6 per cent in September on falling oil prices, preliminary data released last week showed with business confidence in the currency bloc plunging to a 15-year low.

The eurozone economy is expected to grow by a feeble 0.1 per cent next year, the European Commission said in its latest projections released Monday with inflation sinking to 2.2 per cent next year.

Currently at over 4 per cent, inflation in Britain is expected to tail-off in line with the falling oil price, the dual target of stimulating the flagging economy and supporting a crumbling housing market has taken priority in the British debate.

Gloomy figures on industrial output and unemployment have accelerated the calls for the bank to go further. However, the BoE could prefer to cut the rate in stages, possibly down to 3 per cent by Christmas.


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