IST, AGENCIES


BRUSSELS/LONDON: Europe’s central banks moved headfirst to confront the recession brought on by the financial meltdown, slashing their interest rates Thursday as fears about the health of the continent’s economies grew.

In Brussels, the European Central Bank, meeting away from Frankfurt as it does twice a year, lowered its rate to 2.5% from 3.25%, putting it at levels last seen in March 2006. The cut was the most aggressive in its 10-year history as central bank to the 15 euro zone countries, a bloc of some 320 million people that accounts for more than 15% of the world’s gross domestic product.

The growing scale of the economic crisis was highlighted Thursday by announcements that both the Bank of England and Sweden’s Riksbank also cut their interest rates aggressively, to 2%. The Riksbank cut by a record 1.75 percentage points, surprising markets, whereas the Bank of England eased its benchmark rate by one percentage point. US interest rates will fall below 1% if the Fed cuts again as expected later this month.

Earlier on Thursday, New Zealand sliced interest rates by a record 150 basis points to a five-year low of 5% and said it would probably have to trim again. Indonesia also made a surprise cut in its key interest rate, by 25 basis points to 9.25%, the first since December 2007 as the government sought to protect the economy.

French President Nicolas Sarkozy announced a stimulus package to help France withstand the crisis just as the government announced that the unemployment rate rose in the third quarter to 7.7%. The 26 billion euro ($32.9 billion) plan will target investment projects rather than directly aiding consumers, earmarking money for infrastructure and support for local authorities as well as moves to help the ailing auto industry.

It is expected to boost French growth by around 0.6% next year, but will also push the deficit to 3.9% of GDP against a previous target of 3.1%.

Europe’s main central banks have been under mounting pressure to ease borrowing costs rapidly after a run of dismal economic data indicating the economic slump will be deeper and longer than previously expected.

The Bank of England’s cut, taking the rate to its equal lowest since 1951, was widely anticipated although it stopped short of calls by some economists and industry leaders for a larger trim.

“You could almost hear the sigh of relief up and down the country,” said Hetal Mehta, senior economist at the Ernst & Young ITEM Club. “The bank has given the economy the right medicine at the right time.”

Official figures have confirmed that the 15 countries that share the euro are in recession while inflation is falling at a faster rate than anticipated amid sliding energy and commodity costs. Data has also shown an ongoing reluctance by banks to resume normal lending to businesses and households. In Britain, the government has warned that the economy will contract by over 1% in 2009 and that deflation — falling prices — is a bigger threat than inflation in the coming months.

European Central Bank President Jean-Claude Trichet said the euro region’s economy will shrink next year. “Global and euro-area demand are likely to be dampened for a protracted period of time,” Trichet said at a press conference in Brussels on Thursday.

The euro-region economy shrank 0.2% in the third quarter as investment fell and consumer spending stagnated, the European Union’s statistics office Eurostat said on Thursday.

In Britain, the bad economic news mounted just hours ahead of the central bank’s monthly rate-setting announcement with the country’s biggest mortgage lender reporting that house prices fell at their fastest monthly rate in 16 years during November and a car industry update showing new car sales fell 37% from a year earlier.

Interest rate cuts spur growth by reducing borrowing costs but can also make inflation worse; but with oil prices having dropped by two-thirds since July to a three-year low of below $47 a barrel, many think inflation is less of a worry and the economic downturn is dire enough to make the central banks keep cutting.

The Bank of England said its nine-member rate-setting committee had decided that there “remained a substantial risk” of inflation undershooting its 2% target in the medium term, an analysis that was the key factor in Thursday’s decision.

Many economists expect British interest rate to fall further in the coming months to 1% or even zero, either of which would take the rate to an all-time low — rates have never fallen below 2% since the Bank of England was founded in 1694.

The crisis has devastated industries, including the US auto industry, which is lobbying Washington for a bailout.
Prime Minister Vladimir Putin of Russia — which along with China, Indian and Brazil was a dynamic emerging market in the heady days before the downturn — blamed the United States for “infecting” leading world economies with the crisis.

He predicted Russia would survive with “minimal losses” and pledged to maintain rises in social spending and avoid a sudden devaluation. In China, Zhou Xiaochuan, head of the People’s Bank of China, expressed confidence his country could sustain economic growth and financial stability but said “timely, effective and pre-emptive measures” were needed.

China cut interest rates last week to spur the economy and Australia and Thailand followed this week to avoid recession.

Japanese companies have also slashed spending, showing the economy was in a deeper recession than the government estimated.