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European central banks open the door to more rate cuts
Published in Saudi Press Agency on 05 - 00 - 2009


European central banks have opened the
door to further rate cuts with the Bank of England (BoE) delivering Thursday a 50-basis points reduction in borrowing costs, according to dpa.
But while the BoE announced in London it was reducing the cost of money in Britain to 1 per cent, the European Central Bank (ECB) meeting in Frankfurt said Thursday it was keeping borrowing costs on hold at 2 per cent.
However, speaking at a press conference following the ECB's governing council meeting, bank chief Jean-Claude Trichet Thursday signaled that the Frankfurt-based ECB might press on with its rate-cutting cycle when it meets in March.
"I don't exclude that we could decrease rates at our next meeting," Trichet told journalists.
When asked at the press conference whether the ECB will cut by 50 or 25 basis points, Trichet said: "It would probably more be the first figure."
A 50 basis points cut would bring official rates in the 16-member eurozone down to an historic low of 1.50 per cent.
But despite dwindling inflation and slowing economic growth, Trichet went on to say that "zero interest rates is not something we think is appropriate."
"The global economy is in the throes of a severe and synchronized downturn," said the BoE said in a statement.
"Output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly," the BoE said.
In the meantime, the ECB appears to be attempting to buy time as it assess the total of 225 basis points of rate cuts that the bank has delivered since October last year.
"We are in an uncertain universe," said Trichet. "We have to be prepared for everything."
The ECB chief also said he not exclude the bank pursuing as non-standard measures, possibly including purchases of corporate and government bonds, to help address what he said was "a absence of confidence".
In March, the ECB's 22-head rate-setting council will also be able to consider the bank's new staff projections on economic growth and inflation.
The Frankfurt-based ECB's decision to take a break in its rate-cutting cycle comes after the bank delivered a hefty 50 basis points cut last month.
The Czech national also cut rates by 50 basis points Thursday as a sign of the economic deterioration underway in emerging Europe.
Economists also believe that the BoE's nine-member monetary committee (MPC) under governor Mervyn King will continue trimming rates as it tries to spur economic growth in the country.
Annual inflation in Britain edged down to 3.1 per cent in December with the nation's economy having shrunk by a sharp 1.5 per cent in the fourth quarter last year and unemployment surging to near a 12-year high.
British interest rates are at a historic low with the MPC having slashed rates from 5 per cent at the start of October in the hope of pulling the nation's economy out of worst of the recession since 1980.
The IMF predicts the British economy will contract by 2.8 per cent in 2009 with growth in the eurozone slumping by 2 per cent.
Meanwhile, annual eurozone inflation dropped to its lowest level in about a decade in January, tumbling more than forecast to 1.1 per cent on the back of falling oil prices and a slowing economy.
At 8 per cent, eurozone unemployment is now at its highest level in more than two years with companies having cut production and laid off workers across the currency bloc.
Further underscoring the current bleak economic picture facing the eurozone, data released this week showed unemployment in Spain ballooning out by 47 per cent over the year in 2008.
Figures published while the ECB was deliberating Thursday showed key German factory orders plunging by 27.7 per cent year on year in December.


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