WORLD> Europe
ECB makes its biggest ever rate cut
(Agencies)
Updated: 2008-12-05 07:52

The European Central Bank delivered the biggest interest-rate cut in its 10-year history after the economic slump deepened and the inflation rate plunged.

ECB policymakers meeting in Brussels lowered the benchmark lending rate by 75 basis points to 2.5 percent. The Bank of England and Sweden's Riksbank lowered rates more aggressively than the ECB yesterday.

Central banks around the world are cutting borrowing costs by unprecedented amounts in a bid to contain the fallout from the financial crisis, which has already pushed the euro region into its worst recession in 15 years. Until yesterday, the ECB had restricted itself to two 50-point cuts, with President Jean-Claude Trichet stressing its role as an "anchor of stability".

"This is better than 50 basis points, but they are still late coming to the party," said Laurent Bilke, an economist at Nomura International in London who used to work as a forecaster at the ECB. "The economy is in deep recession now, so rates should come down as quickly as possible.

Worldwide cuts

The ECB's move is the latest in a round of rate reductions across the globe yesterday.

The Bank of England cut its key rate by 100 basis points to 2 percent, after last month lopping 150 points off its benchmark. Sweden's Riksbank sliced 175 points off its main rate, taking it to 2 percent, New Zealand cut by 150 points and Indonesia unexpectedly lowered borrowing costs for the first time in a year. The US Federal Reserve has reduced its key rate by 325 points this year, taking it to 1 percent.

"The ECB tends to be more conservative, with more of a steady-hand policy," said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. "With the economy contracting sharply, it's time to step up the pace of rate cuts."

Manufacturing and service industries contracted at the fastest pace on record in November and economic confidence plunged to a 15-year low. With oil prices collapsing, the inflation rate fell the most in almost 20 years last month, to 2.1 percent from 3.2 percent in October.

The International Monetary Fund predicts the euro-region economy will contract 0.5 percent in 2009.

"We've seen a significant deterioration in the business environment in the past few weeks and that will require a serious monetary stimulus," said Marc Stocker, director of economics at the BusinessEurope lobby group in Brussels.

Still, "the economic slowdown is not over, so it's important for the ECB to keep its powder dry".

Some ECB policymakers have advocated a measured approach to tackling the recession. Executive Board member Lorenzo Bini Smaghi said on Nov 25 that "sharp" rate reductions "may contribute to, rather than obviate, a worsening of market sentiment". The same day, council member Ewald Nowotny said that he favors retaining some "firepower".

"While the euro system's banking sector is not in good shape, the situation is not as acute as the ones in the US and the UK," said Philip Lane, professor of international macroeconomics at Trinity College, Dublin.

"Don't forget, the euro has weakened considerably against the dollar, and that's a substitute for a rate cut."

The euro dropped 20 percent against the dollar to $1.26 yesterday from a July peak of $1.60, making European exports more competitive abroad.