The ECB governing council lowered its benchmark rate by 0.50 percentage points to 3.25 per cent on Thursday. -- PHOTO: AFP
FRANKFURT - THE European Central Bank cut its key lending rate on Thursday shortly after the Bank of England slashed British borrowing costs by an unprecedented 1.5 percentage points to head off a feared recession.
The ECB governing council lowered its benchmark rate by 0.50 percentage points to 3.25 per cent.
ECB unveils 33-day loans of $38.9 billion
FRANKFURT - THE European Central Bank said on Thursday that it had lent eurozone banks 20.4 billion euros (S$38.9 billion) for a month as it pursued a policy of pumping funds into interbank money markets.
The money was lent to 55 banks for 33 days starting on Friday at the bank's current benchmark rate of 3.75 per cent, which analysts expected to be cut later
in the day by at least a half percentage point.
FRANKFURT - THE European Central Bank slashed interest rates by 50 basis points on Thursday, hoping to breathe life into the euro zone 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 euro zone's sharply deteriorating economic outlook and easing inflation pressures.
Bank of England slashed its benchmark interest rate
LONDON - THE Bank of England slashed its benchmark interest rate by 1.5 percentage points on Thursday, a bold cut that far exceeded economists' expectations and reflected fears that Britain is headed for a prolonged, deep recession.
The cut to a 3 per cent base rate - the biggest trim in 27 years - took markets by surprise, with analysts expecting a 1 percentage point trim at the outside.
LONDON - STERLING initially fell and UK interest rate futures soared on Thursday after the Bank of England surprised markets by delivering a much bigger-than-expected cut in interest rates to boost the ailing economy.
The UK central bank slashed rates by 1.5 percentage points to 3.0 per cent, wrongfooting market expectations for a cut of up to 1 percentage point , due to tighter credit conditions as the global banking system was experiencing its most serious disruption in almost a century.
In London earlier, the Bank of England cut a massive 1.5 percentage points off its main rate to 3.0 per cent, the largest reduction since the British central bank became independent in 1997.
Bank of America senior economist Holger Schmieding told AFP after the announcement that ECB president Jean-Claude Trichet 'will leave the door open to a further cut in December' at a press conference scheduled later in the day.
Economist Jennifer McKeown at Capital Economics said 'there is still much more to come.' She said the ECB's 0.50 percentage point decrease 'came as a disappointment in the end after far more agressive action from the Bank of England' while Mr Schmieding noted that a cut of '75 basis points from the ECB would also have fit the picture'.
In Switzerland, the Swiss National Bank announced on Thursday an unscheduled cut in its reference rate, the three-month Libor rate, by a half percentage point to 1.5-2.5 per cent.
On October 8, the ECB cut the cost of borrowing by a half a percentage point in an exceptional joint move with the US Federal Reserve and five other central banks to boost battered financial markets.
The Fed has since then reduced its rates to a historic low of 1.0 per cent.
On Thursday, the ECB also reduced its two other reference rates - the deposit rate and the marginal lending rate - to 2.75 per cent and 3.75 per cent respectively.
Inflation, the bank's main concern, is still strong at 3.2 per cent but is falling quickly towards the ECB target of just below 2.0 per cent as the global financial crisis leads to a sharp economic slowdown that has cut demand.
'Inflation may go down to below 2.5 per cent by year end,' Natixis economist Ceric Thillier forecast.
The European Commission warned earlier this week that the worst financial crisis since the Great Depression has pushed the eurozone into its first recession - two quarters running of economic contraction - since the bloc was formed in 1999.
In Germany, the biggest European economy, industrial orders collapsed in September, shedding 8.0 per cent from August according to an economy ministry estimate, as weaker global activity slammed the country's key export sector.
It was the biggest drop since Germany's reunification in October 1990.
In Frankfurt, Mr Trichet will probably also provide excerpts of the ECB's latest bank lending survey, the first since US investment bank Lehman Brothers filed for bankruptcy in September.
Mr Schmieding said he expected the ECB president to reveal 'that there has been a significant tightening in lending conditions. Really a significant one that makes a genuine difference for the real economy.'
Another thing the Bank of America economist will listen for was whether Trichet will 'acknowledge that inflation by the middle of next year could fall to one per cent or lower', that is, faster than the bank's previous forecast of inflation below 2.0 per cent in 2010.
Ms McKeown said that given the severe downturn in economic activity, ECB concern about inflation 'must have virtually disappeared'.
Finally, Mr Schmieding asked, 'will he (Trichet) admit or not that GDP (gross domestic product) change might be negative, that GDP may decline next year?' ECB officials are clearly aware of the various threats, with chief economist Juergen Stark saying on Wednesday: '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.'
Most analysts now see the key ECB lending rate falling to 2.0 or 2.5 per cent by mid 2009. -- AFP
