Business | Economy
Europeans make big rate cuts to fight recession
The European Central Bank, Britain and Sweden all made big cuts in interest rates yesterday to shore up econ-omies across Europe in the face of ever-bleaker financial news.
- Reuters
- Published: 23:35 December 4, 2008
London: The European Central Bank, Britain and Sweden all made big cuts in interest rates yesterday to shore up econ-omies across Europe in the face of ever-bleaker financial news.
The cuts were applauded by many analysts but market reaction indicated that even more sweeping moves may be needed to halt the decline.
Sweden lopped off a record 175 basis points to 2.0 per cent and the ECB slashed 75 points to 2.50 per cent, the eurozone's biggest ever cut.
The Bank of England chopped 100 basis points for an interest rate of 2.0 per cent, the lowest level since 1951, as recession loomed over Britain.
The rate cuts are aimed at making credit cheaper and so boost spending, but banks will need to overcome their reluctance to lend for the measure to take hold and savers will suffer.
Sweden's central bank, the Riksbank said it expected rates to remain at the new 2.0 per cent level over the coming year. There was an "unexpectedly rapid and clear deterioration in economic activity since October," it said.
The Bank of England, also taking rates to 2.0 per cent, made clear the downturn had gathered pace and conditions in credit markets remained difficult.
"Across the UK, deteriorating house prices and rising unemployment are both taking their toll on business and consumer confidence," said Trevor Williams, chief economist, Lloyds TSB Corporate Markets.
Analysts had widely expected the move following business indicators suggesting Britain's economy could be heading for an even deeper recession than most people had predicted.
But it disappointed some investors who had begun to speculate on a bigger easing following Sweden's action and European shares and bund futures pared yesterday's earlier gains.
Most analysts had predicted a 50 basis point cut by the ECB, but with inflation plummeting and the economy of the 15-nation eurozone sinking deeper into recession, it opted for a bigger slice. "They are now taking bolder decisions and this reflects a shift in perception in the ECB," said Bank of America economist Gilles Moec.
Nevertheless, European shares gave up gains to turn deeply negative, tracking US index futures after a bearish update from chemicals group DuPont.
US interest rates will fall below 1 per cent if the Fed cuts again as expected later this month.
Earlier yesterday, New Zealand sliced interest rates by a record 150 basis points to a five-year low of 5.0 per cent and said it would probably have to trim again.
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