Berlin - The European Central Bank (ECB) and the Bank of
England (BoE) are set to deliver further steep reductions in
borrowing costs this week as the wave of rate cuts across the global
economy gains momentum.
Amid signs that global economic contraction is picking up speed
and that inflationary pressures are fading, the ECB meeting in
Brussels and the BoE convening in London are expected to announce on
Thursday they have slashed the cost of money by at least 50 basis
points.
This would bring the ECB's refinancing rate down to 2.75 per cent,
while a 50-basis-point reduction would lower British borrowing costs
to 2.5 per cent and represent the BoE's third consecutive monthly
rate cut.
However, some economists believe that both the ECB and the BoE
will be forced to slash rates by more and to deliver 75 or even 100-
points cut in a bid to haul Europe out of recession.
But the Frankfurt-based ECB has never cut rates by more than 50
basis points so a 75 or 100-basis-point reduction this week at what
is one of its regular out-of-town meetings in Brussels would serve to
underscore the gravity of the threat facing the European economy.
Indeed, since the BoE surprised markets last month with a dramatic
150-basis-point reduction, grim economic indicators have continued to
roll in as a result fuelling speculation about the depth of the
British recession with the manufacturing purchasing managers' index
tumbling to an all-time low.
At the same time, while figures showed Britain's annual inflation
rate recording its biggest monthly fall in 16 years in October to
drop to 4.5 per cent, data has also showed production and industrial
orders slumping, house prices plunging, consumer spending sinking and
unemployment rising amid continuing tight credit markets.
'So with bank credit continuing to dry up and activity slowing in
a dramatic fashion, we look for the BoE to cut rates by 100 basis
points this Thursday with rates down to just 1 per cent in early
2009,' ING economist James Knightley said.
But even if the BoE's monetary policy committee and the ECB's
rate-setting governing council decide against reducing the cost of
borrowing by more than 50 basis points this week, economists are
predicting that Europe's two leading central banks will press on with
their rate-cutting cycle well into the new year.
Economic sentiment in the eurozone tumbled to a 15-year low in
November, a key survey released last week showed, after the currency
bloc tipped into recession in the third quarter.
This is already starting to filter through to the eurozone's jobs
market, with unemployment posting its biggest monthly increase in
October surging to 7.7 per cent, which was its highest level in
nearly two years.
At the same time, annual eurozone inflation last month chalked up
its biggest fall in almost 20 years, dropping to a lower-than-
forecast 2.1 per cent in November from 3.2 per cent in October.
The fall in the November inflation rate took consumer prices back
down close to the ECB's 2-per-cent target for annual inflation after
it hit a 16-year high of 4 per cent in June as oil prices headed
towards a record of nearly 150 dollars a barrel.
But since then oil prices have been in retreat, crashing to a 22-
month low of under 50 dollars a barrel last month as a slowing world
economy hits energy demand.
Falling inflation 'gives the ECB room to continue to cut rates
quickly,' said Commerzbank economist Christoph Weil, who predicts
that eurozone inflation could drop to as low as 1 per cent by early
next year.
Adding to the pressure on the banks to go further than 50 basis
points this week has been the series of rapid-fire cuts delivered by
the US Federal Reserve as well as the moves to ease monetary policy
around the world with Switzerland's normally conservative national
bank last month chopping 100 basis points off rates.
Last week, China also announced a 108-point cut, which was the
biggest reduction in borrowing costs in the country since the Asian
financial crisis a decade ago.
In the meantime, Sweden's central bank said it was bringing
forward its regular meeting by about two weeks to Wednesday, sparking
speculation that the Riksbank was likely to slash rates again.
On Tuesday, an emergency meeting of the Bank of Japan agreed to a
series of new measures to help free up corporate financing.
Earlier on Tuesday, Australia's Reserve Bank delivered its fourth
rate cut in as many months slashing rates by 100 basis points to a
six-and-a-half year low of 4.25 per cent with economists predicting
more reductions are on the way.
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