FRANKFURT - EUROPEAN central banks slashed interest rates on Thursday and held the door open to even easier monetary policies, but stocks plunged on fears the region's economy is heading into a long recession.
The European Central Bank cut its key lending rate by half a point to 3.25 per cent shortly after the Bank of England lowered British borrowing costs by a massive 1.5 percentage points to 3.0 per cent, its lowest level in nearly half a century.
BOE's rate cut praised
LONDON - BRITISH newspapers breathed a sigh of relief on Friday at the Bank of England's (BOE) announcement that it was cutting interest rates by a record 1.5 percentage points to 3.0 per cent.
But they warned that there was still trouble on the horizon with Britain on the verge of a recession and the global economy in a highly volatile state.
ECB president Jean-Claude Trichet suggested more reductions could be on the way, telling a Frankfurt press conference: 'I don't exclude that we could decrease rates again.'
Stock markets failed to respond however, and London's FTSE index lost 5.70 per cent at the close, while Frankfurt's DAX was off by 6.84 per cent.
Economist Jennifer McKeown at Capital Economics said the ECB cut 'came as a disappointment in the end after far more agressive action from the Bank of England'.
In Switzerland, the SNB announced an unscheduled cut in its reference rate, the three-month Libor rate, by a half percentage point to 1.5-2.5 per cent.
Commenting on the ECB cut, UniCredit chief economist Aurelio Maccario said 'we were clearly left with the feeling that today was a missed opportunity' to reduce rates further.
On Oct 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 again to a historic low of 1.0 per cent. Other central banks are also in a rate-cutting mode, with the Czech National Bank lowering its key interest rate by 0.75 percentage points to 2.75 per cent on Thursday, against expectations for just a quarter-point cut.
Authorities in Australia, China, India, Japan, Norway and Sweden have recently reduced borrowing costs as well.
The ECB statement and Mr Trichet pressed commercial banks to lend to each other more freely and to businesses since unprecedented measures had been taken by central banks and euro zone governments to reduce risks.
'We are living in another universe since the 15th of September in some respect,' Mr Tichet said in reference to the day US investment bank Lehman Brothers declared bankruptcy, a move that shocked interbank lending markets.
The ECB president underscored the impact of 'two 50 basis points rate decreases in less than one month,' saying: 'We never did that before.'
The ECB statement added: 'We expect the banking sector to make its contribution to restore confidence.'
A bank lending survey to be released on Friday showed that banks expected a 'net tightening of credit standards particularly for loans to enterprises,' Mr Trichet said.
That is so even though central banks have pumped massive amounts of money into markets on which banks lend to each other to ensure that cash is available to underpin their lending operations.
Governments are also offering hundreds of billions of euros in loan guarantees and cash to be used by banks to bolster their equity ratios.
Commercial banks 'have to understand that they are in a different universe,' Mr Trichet stressed. But despite the expectations of tighter credit, he said that 'we see no credit crunch' developing, especially in terms of loans to households.
Inflation meanwhile, the ECB's main concern, is still strong at 3.2 per cent but is falling towards the bank's target of just below 2.0 per cent as the global financial crisis leads to a sharp economic slowdown that has cut demand.
'The outlook for price stability has improved further,' an ECB statement acknowledged. 'Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009.'
Previously, the ECB had not expected inflation to reach its target before 2010.
It also said that 'the intensification and broadening of the financial market turmoil would is likely to dampen global and euro area demand for a protracted period of time.'
The euro zone is heading into its first recession - two quarters running of economic contraction - since the bloc was formed in 1999.
Most analysts expect the key ECB lending rate to fall to 2.0 or 2.5 per cent by mid 2009. -- AFP
