ECB Cuts Interest Rate As Recession Fears Deepen | Business| Economy and finance news from a German perspective | DW | 15.01.2009
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ECB Cuts Interest Rate As Recession Fears Deepen

The European Central Bank lowered its key interest rate by half a percentage point to two percent Thursday in an effort to stave off a deep recession in the 16 countries that use the euro.

A Euro sculpture in front of the European Central Bank in Frankfurt

The ECB said the eurozone economy was looking weaker than the bank thought a month ago

The reduction of the benchmark refinancing rate to two percent came amid a slowdown in inflation and a flood of gloomy economic data in what is shaping up to be a tough economic year.

Despite two percent being "the lowest level we ever decided," European Central Bank (ECB) president Jean-Claude Trichet gave a strong hint that a further cut was likely if the eurozone economy did not show signs of recovery by March.

"We did not say it was now the limit and we would not move any more," he said after a meeting of the bank's governing council on Thursday, Jan. 15. "We said that we were anticipating future bad news (…) from the real economy."

There remains clear evidence the euro zone economy is experiencing "a significant slowdown," Trichet said, adding that financial market turmoil is keeping the level of uncertainty exceptionally high.

Jean-Claude Trichet

Trichet said the latest data showed a further weakening of economic activity

It was the fourth time since October that the bank had cut rates, including a reduction of borrowing costs by 75 basis points in December, the biggest in its 10-year history. But it still leaves the rate above that of the US Federal Reserve, which has cut borrowing costs to near zero, and the Bank of England, whose main lending rate is at an historic low of 1.5 percent.

"Today's decision takes into account that inflationary pressures have continued to diminish," said Trichet, who forecast that inflation in the eurozone would continue to ease until mid-year. Trichet said he did not expect next month's scheduled meeting of the ECB council to alter interest rates, because the date was only three weeks away.

The next interest rate review would be in early March "where we will have substantial new information," said Trichet. "That being said, we are never pre-committed."

Recession threatening most eurozone countries

Lower interest rates make it cheaper for companies and consumers to borrow money, something which governments are banking on to spur growth and cushion the impact of a deepening recession.

After the rate cut, the euro slumped to 1.3085 dollars, its lowest in a month, as the common currency became less attractive to investors.

Recent economic data has shown that a number of countries in the 16-member eurozone are already in recession, with others facing a severe economic downturn. In Germany, Europe's biggest economy, annual growth in 2008 slumped to 1.3 percent, nearly half of what it was the year before, as the economy contracted up to two percent in the final quarter.

Analysts predict the German gross domestic product (GDP) could shrink between two to three percent this year, something which would have repercussions across Europe.

Euro-area industrial production slumped for the seventh consecutive month in November, leaving it 7.7 percent below what it was a year earlier.

Consumer prices dip

Figures released by the European Union's statistics office, Eurostat, showed seasonally adjustment unemployment in the euro region inching up to 7.8 percent in November.

Eurozone inflation plunged to its lowest level in more than two years in December, dropping to a lower-than-forecast 1.6 percent from 2.1 percent in November. The fall in inflation also took consumer prices comfortably below the ECB's annual inflation target of close to, but below two percent for the first time since August 2007.

"The governing council will continue to keep inflation expectations firmly anchored in line with its medium-term objective of inflation rates below, but close to two percent," Trichet said. "We will continue to monitor very closely all developments over the period ahead."

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