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Europe

European Stocks Rebound After Central Banks Cut Rates

The European Central Bank delivered an unprecedented 75 basis points cut in interest rates Thursday, underscoring the dramatic deterioration in Europe's economy.

ECB President Jean-Claude Trichet

The European Central Bank ECB forecasts economic weakness will persist into 2009

The reduction was the biggest rate cut since the notoriously cautious ECB took charge of euro zone monetary policy about 10 years ago and brought borrowing costs in the currency bloc down to 2.5 percent.

"The current economic conditions warrant unprecedented action," said Klaus Baader, Merrill Lynch's London-based chief European economist, with analysts expecting the ECB's 21-member rate-setting council to press on with its rate-cutting cycle well into next year.

The ECB has now trimmed rates by 175 basis points since it joined the world's other leading central banks in early October as part of coordinated moves to help spur economic growth.

UK and Swedish cuts

Convening in Brussels, the Frankfurt-based ECB's announcement followed a decision by the Bank of England (BoE) to lop another 100 basis points off UK rates and Sweden's national bank's move to slash rates by 175 basis points.

The Swedish central bank nearly halved its key rate to 2 percent, saying in a statement that "the fact the interest rate needs to be cut substantially is also due to monetary policy not having such a large impact recently as it normally does."

A sign is seen at The Bank of England in London

British interest rates are at their lowest level since 1951

Thursday's announcement by the BoE's nine-member monetary policy committee likewise brought British rates down to 2 percent, their lowest level since 1951. It also came in the wake of the London-based bank's decision to cut rates four weeks ago by a dramatic 150 basis points.

As part of its own contribution to an EU bid to fight off recession, France is set to announce a state-spending stimulus package expected to total 25 billion euros ($31.7 billion).

Shares up

European shares opened Thursday in a weak state, but shot up after news of the Swedish rate cuts and in anticipation of the ECB cuts.

London stocks gained 1.48 percent, the Euro Stoxx 50 index was up 1.63 percent and shares in Frankfurt and Paris rose by around 2.5 percent.

Early Thursday, the FTSEurofirst 300 index of top European shares was up 1.3 percent at 841.05 points.

Thursday signalled the third consecutive session of gains as investors showed their hope the continent-wide rate cuts would help soothe the global economic slump.

Market reactions in Asia were mixed, however, with Tokyo and Seoul losing 0.62 percent and 1.23 percent respectively, and Hong Kong and Shanghai gaining 0.67 percent and 3.63 percent.

2009 recession

At a press conference later Thursday, ECB chief Jean-Claude Trichet said the bank expected the euro zone to slip into recession next year with a contraction of 0.5 percent in gross domestic product.

"On the basis of our current analysis and assessment we see global economic weakness and very sluggish domestic demand persisting in the next few quarters," he said.

The projection underscores that the economic slump in the euro zone has gained momentum since the release of the last projections in September, when it was believed the euro zone economy would grow by 1.2 percent.

Frankfurt stock exchange

The euro zone is tipped to head into recession next year

Data released last week showed annual euro zone inflation chalking up its biggest fall in almost 20 years in November to drop to a lower-than-forecast 2.1 percent from 3.2 percent in October.

Protracted downturn

Economists had been divided in the run-up to Thursday's ECB meeting on the size of the reduction with some believing that slumping economic growth and dwindling inflation would result in the bank slashing rates by even 100 basis points.

However, the majority of economists had predicted that the ECB would stick to past practice and not reduce borrowing costs by more than 50 basis points at one meeting.

But then Thursday's ECB rate decision followed a slew of indicators which raised fears that the 15-member euro zone could be heading for a protracted economic downturn.

Economic sentiment in the euro zone tumbled to a 15-year low in November, a key survey released last week showed, after the currency bloc tipped into recession in the third quarter.

The sharp economic contraction is already starting to filter through to the euro zone's jobs market, with unemployment posting its biggest monthly increase in October, surging to reach its highest level in nearly two years of 7.7 percent.

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