Published March 6, 2009

ECB and BOE cut rates to record lows

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(FRANKFURT) The European Central Bank (ECB) and the Bank of England (BOE) yesterday cut interest rates to a record low in an attempt to stem the worst recession since World War II.

ECB officials meeting in Frankfurt reduced the benchmark lending rate by half a percentage point to 1.5 per cent while separately, the Bank of England cut its key rate by half a point to 0.5 per cent - the lowest since the bank was founded in 1694. The British central bank also said it will start printing money to buy assets.

The new ECB rate is the lowest since the ECB took control of monetary policy in 1999. Money market traders and other financial players had fully priced in the cut, steered by dire eurozone economic data in recent weeks and a steady stream of hints from policymakers.

The bank may wait until May to cut rates further, another survey of economists shows.

Speaking to reporters after the rate cut announcement,ECB chief Jean- Claude Trichet said the bank's governing council was studying possible non-standard monetary measures, known by economists as quantitative easing.

Mr Trichet has been reluctant to follow the US Federal Reserve and the Bank of England, which have cut rates towards zero and started using other policy tools, for fear that will sow the seeds of future crises.

The ECB has 'misjudged the severity of the economic downturn', said Julian Callow, chief European economist at Barclays Capital in London. 'The monetary policy stance of the ECB is delaying the recovery. We're looking at 2012 to fully make up for the contraction of the economy.'

The euro-region economy shrank 1.5 per cent last quarter and latest data suggests the recession is deepening. Manufacturing contracted at a record pace last month, confidence is at an all-time low, unemployment is climbing towards 10 per cent and inflation, at 1.1 per cent, is the weakest since 1999.

The ECB was expected to slash its growth and inflation forecasts yesterday, said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan. He expected the bank to predict the economy will shrink about 2.2 per cent this year. Last December, it forecast a 0.5 per cent contraction.

'They need to go down with rates but that won't be enough,' Mr Maccario said. 'They need to start thinking about extraordinary measures to help get credit flowing.'

The Fed is already buying commercial paper to ease the credit crunch and the Bank of England said yesterday that it will start buying UK government bonds to increase money supply - a policy known as quantitative easing.

ECB council member Athanasios Orphanides has argued that the bank could adopt similar measures to boost its economy, challenging Mr Trichet's view that they have 'drawbacks' and should be avoided. -- Bloomberg, AFP, Reuters