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Business

Europe Follows Britain's Lead With Interest Rate Cut

Faced with a looming recession and rapidly falling inflation, the European Central Bank (ECB) cut rates by 50 points Thursday as monetary authorities around the world step up efforts to cut the cost of money.

euro symbol

Thursday's cuts brought rates in the euro zone to 3.25 percent

The ECB's move followed the Bank of England's (BoE) dramatic announcement that it was slashing rates by 1.5 percentage points to 3 percent.

The BoE's more-than-forecast cut underscored the speed of the economic deterioration threatening Britain with the most aggressive forecasts for the British central bank to cut by 100 basis points.

Thursday's cuts in borrowing costs brought the rates in the 15-member eurozone down to 3.25 percent and to 3 percent in Britain. The ECB has now slashed rates by 100 basis points in just four weeks, while the BoE has trimmed rates by 250 basis points in a month.

Analysts expect both banks to follow up Thursday's cuts with more reductions in borrowing costs in the coming months and predict that rates could be as low as 2 percent by the middle of next year.

The global drive to lower rates also forms part of the build-up to a meeting of European Union leaders in Brussels Friday and a larger gathering of the Group of 20 government chiefs in Washington in a week to discuss measures for dealing with the global financial crisis.

World-wide cuts

Bank of England

The Bank of England's cuts have been more aggressive

Indeed, this week's ECB and BoE reductions also come in the wake of new wave of rate cuts around the world lead by the US Federal Reserve and the Bank of Japan.

The monetary authorities in Norway, Slovakia, the Czech Republic, South Korea, Taiwan, Israel and China have also reduced the cost of money in the run-up to Thursday's BoE's nine-member monetary committee meeting in London and the ECB's 21-head governing council gathering in Frankfurt.

On Tuesday, Australia's Reserve Bank delivered its third rate cut in as many months slashing rates by a hefty 75 basis points.

More to the point, the gloomy global economic outlook and falling inflation is giving central banks around the world room to move on borrowing costs.

Eurozone inflation slipped to 3.2 percent in October from 3.6 percent in September on falling oil prices. Preliminary data released last week showed business confidence in the currency bloc plunging to a 15-year low.

The eurozone economy is expected to grow by a feeble 0.1 percent next year, the European Commission said in its latest projections released Monday inflation would sink to 2.2 per cent next year.

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