London/Frankfurt - Faced with a looming recession and
rapidly falling inflation, Europe's leading central banks delivered
hefty rate cuts Thursday as monetary authorities around the world
stepped up efforts to trim the cost of money.
While the European Central Bank (ECB) meeting in Frankfurt lopped
50 basis points off its benchmark refinancing rate, the Bank of
England meeting in London announced a more dramatic 150-basis-point
reduction.
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
with analysts expecting both banks to follow up Thursday's moves with
more reductions in the coming months.
'I don't exclude we could cut rates again,' ECB chief Jean-Claude
Trichet told a press conference Thursday following the meeting of the
ECB's 21-head rate-setting council.
The ECB chief said the financial crisis was 'broadening and
intensifying' and was likely to dampen economic activity around the
world and in the eurozone for a protracted period.
At the same time, he also saw the financial crisis undercutting
inflation amid renewed talk of the growing risk of deflation. Only
three months ago, the ECB was warning about the inflationary threat
posed by surging energy costs.
Moreover, the BoE's more-than-forecast reduction in the cost of
money again served to highlight the scale of the economic threats
facing Britain with the most aggressive interest rate forecasts for
the British central bank calling for a 100-basis-point cut.
While welcoming the BoE cut, Graeme Leach, chief economist at
Britain's Institute of Directors said: 'The reduction shows that the
(BoE's) monetary policy committee think inflation is yesterday's
story and deflation is the risk for tomorrow.'
The London-based central bank said in a statement that Britain had
seen a 'substantial downward shift in the prospects for inflation' in
the past two months and commodity prices had fallen sharply.
At the same time, the BoE said there had been a 'very marked
deterioration in the outlook for economic activity at home and
abroad.'
Speaking at his press conference, Trichet said that the ECB's
governing council had considered delivering a more dramatic 75 basis
points Thursday but had unanimously agreed to the 50 basis points
reduction.
He also went on to say that so far there was no evidence that the
US mortgage market meltdown had resulted in a tightening of credit
markets in the eurozone as they had in other parts of the world. 'We
see no credit crunch,' Trichet said.
Both the ECB and the BoE last cut rates four weeks ago as part of
a coordinated move by the world's leading central banks aimed at
shoring up economic and financial confidence.
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 in a
week to discuss measures for dealing with the global financial crisis.
This week's ECB and BoE reductions also come in the wake of a 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 recently 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 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.
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.
USA
Your Talkback on this Story