The European Central Bank (ECB) lowered interest rates for the second time in less than a month to counter the euro region’s worst economic slump in 15 years.
ECB policy makers meeting in Frankfurt reduced the benchmark lending rate by half a percentage point to 3.25 per cent. The ECB cut the rate by the same amount when it joined a globally coordinated move on October 8 in response to the deepening financial crisis. The Bank of England on Thursday lowered its key rate by 1.5 percentage points to 3 per cent and Switzerland’s central bank lowered rates in an unscheduled move.
Economists predict the ECB will continue to reduce borrowing costs at the most aggressive pace in its 10-year history, taking its key rate to 2.5 per cent by April as growth slows around the world. The economy of the 15 nations sharing the euro is probably already in a recession and will stagnate in 2009, the European Commission said this week.
“The dimension of the crisis requires forceful action,’’ said Michael Schubert, an economist at Commerzbank in Frankfurt. “The ECB is more focused on the risks to growth.’’
Trichet will “probably leave the door open for further rate cuts,’’ said Holger Schmieding, chief European economist at Bank of America in London. He will “likely warn that the euro economy will not grow at all in late 2008 and early 2009 and recover only haltingly thereafter.’’
Economic growth in the euro area will slump to just 0.1 per cent next year, the worst performance since 1993, the Brussels- based European Commission forecast on November 3. It said the economy, which contracted in the three months through June, will probably continue to shrink in the third and fourth quarters.
Europe’s manufacturing and service industries contracted at a record pace in October, while executive and consumer confidence has slumped to a 15-year low. Manufacturing orders in Germany, Europe’s largest economy, dropped by a record 8 per cent in September, the government said on Thursday.
The crisis that started with the US housing slump and drove Lehman Brothers into bankruptcy caused the biggest global stock sell-off in 70 years. Banks in Europe remain reluctant to lend to each other even after the ECB flooded them with cash and governments announced rescue packages to prevent banking failures.
Swiss central bank reduces rate by 50 bps
The Swiss National Bank (SNB) unexpectedly cut its main lending rate by 50 basis points and said the economy may contract next year.
The central bank, led by Jean-Pierre Roth, lowered its three-month Libor target to 2 per cent on Thursday from 2.5 per cent, it said in a faxed statement from Zurich. The SNB wasn’t scheduled to decide on interest rates until December 11.
“The global economic outlook has deteriorated more severely than anticipated, which will impact growth in Switzerland in the next few quarters,’’ the bank said. “The economic slowdown, the decline in the price of oil and the appreciation of the Swiss franc are reinforcing the expected drop in inflation.’’
on Thursday’s action is the bank’s second inter-meeting cut in a month, as the financial market crisis causes stocks to plunge and forces governments to buy troubled assets. UBS AG, Switzerland’s biggest bank, got a $59.2 billion aid package Oct. 16 after piling up the biggest losses of any European lender from the global credit crisis.
