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Business

European, British Central Banks Cut Interest Rates to Historic Lows

The European Central Bank cut interest rates for the fifth time in six months Thursday, March 5, bringing borrowing costs to an historic low of 1.5 percent. The Bank of England cut its lending rate by 50 basis points.

European Central Bank President Jean-Claude Trichet

Jean-Claude Trichet says interest rates could still be further lowered

The hefty 50-basis-point rate cut by the ECB had been widely expected, with market focus swiftly turning Thursday to a press conference held by the financial body's chief Jean-Claude Trichet, who said the central bank could further lower its main interest rate in the coming months.

"We did not ex ante decide that this was the lowest we could attain," he said.

With inflationary pressures diminishing and a severe economic downturn having set in, Tichet warned that inflation in the 16-member euro zone could slip to "negative levels" in the coming months with the recession playing havoc with public finances across the currency bloc.

But Trichet stressed that the bank saw "a number of drawbacks" with a zero interest rate level and said the ECB was considering a series of "non-standard measures" to help monetary policy underpin growth.

"We do not exclude anything," he said.

Non-standard monetary measures, referred to by economists as quantitative easing, can involve printing more money to ease the pressure on banks.

"We are discussing and studying possible new non-standard measures," he told reporters. "I will not elaborate on that. We have absolutely no pre-commitment to any particular non-standard measure."

Many analysts believe that the ECB will lop another 50 basis points off euro zone rates by the middle of the year, bringing the refinancing rate down to just 1 percent. The ECB has already slashed rates by 225 basis points since October.

Gloomy news

Frankfurt Stock Exchange

The euro zone economy will contract by more than first though, the ECB says

The ECB also released Thursday a series of negative forecasts for the coming two years, saying it expected the euro-zone economy to contract by 2.7 percent in 2009, a significantly gloomier forecast than the central bank's previous prediction of a 0.5 percent shrinkage for this year.

The central bank said it expected zero growth in the European single market in 2010, down from its earlier estimate of 1.0 percent growth.

The bank said output this year could be anywhere between minus 2.2 percent and minus 3.2 percent. Official EU data showed Thursday that collapsing exports and dwindling business investment had pushed the euro zone economy into the deepest contraction in the bloc's 10-year history.

British cuts

Meanwhile, the Bank of England applied the twin tools of interest rate cuts and a boost in money supply in an effort to revive the recession-hit British economy.

The bank's Monetary Policy Committee cut the key lending rate by 50 basis points to 0.5 percent and injected an initial 75 billion pounds (84.6 billion euros) into the economy through quantitative easing.

Under the process, so far untried in Britain, the bank will launch a program of asset purchases -- such as government bonds and corporate assets -- financed by the issuance of central bank reserves.

Outside a Bank of England branch

The Bank of England also cuts lending rates to a record low

With interest rates now close to zero, the BoE had itself admitted it was running out of monetary tools to help revive the economy in the midst of a deepening recession.

"World activity continued to weaken, reflecting both depressed confidence and the persistent problems in international credit markets," the Bank said in a statement Thursday.

Figures down across the board

At the same time, another round of grim earning results from leading banks and financial houses has sparked renewed concerns about the state of the global financial sector.

The International Monetary Fund predicts that euro zone economic growth will slump by 2 percent in the wake of the global downturn, which was triggered by a crisis in the US banking business.

Economic confidence in the euro zone plunged to an historic low last month, the European Commission's closely watched economic sentiment indicator showed last week, while unemployment climbed to a 28-month high of 8.2 percent in January.

Despite February's unexpected tick up in the euro zone's annual inflation rate to 1.2 percent, consumer prices remain well below the ECB's 2-percent inflation target.

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