Britain, Europe cut interest rates

Bloomberg

The Bank of England unexpectedly cut the benchmark interest rate by 1.5 percentage points to the lowest since the 1950s. The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate to 3 percent, the biggest single step in more than a decade.

“It's absolutely staggering and deeply impressive,” said Brian Hilliard, director of economic research at Societe Generale in London. “They are clearly grasping the nettle and taking deep action. Boy, this is going to have an impact.”

The seizure in credit markets has left Britain on the edge of its first recession since 1991, prompting a 50 billion-pound ($80 billion) bank rescue package from the government and a half-point emergency rate cut on Oct. 8. With the economy headed into recession, the danger is that inflation will slow more than policy makers want.

“The risks to inflation have shifted decisively to the downside,” the Monetary Policy Committee said in a statement. Policy makers “judged that a significant reduction in Bank Rate was necessary now in order to meet the 2 percent target” for inflation. ECB cuts half percent:The European Central Bank lowered interest rates for the second time in less than a month to counter the euro region's worst economic slump in 15 years.

ECB policy makers meeting in Frankfurt reduced the benchmark lending rate by half a percentage point to 3.25 percent. The ECB cut the rate by the same amount when it joined a globally coordinated move on Oct. 8 in response to the deepening financial crisis.

Economists predict the ECB will continue to reduce borrowing costs at the most aggressive pace in its 10-year history, taking its key rate to 2.5 percent by April as growth slows around the world. The economy of the 15 nations sharing the euro is probably already in a recession and will stagnate in 2009, the European Commission said this week.

“The dimension of the crisis requires forceful action,” said Michael Schubert, an economist at Commerzbank in Frankfurt. “The ECB is more focused on the risks to growth.”

Europe's manufacturing and service industries contracted at a record pace in October while executive and consumer confidence has slumped to a 15-year low. Manufacturing orders in Germany, Europe's largest economy, dropped by a record 8 percent in September, the government said yesterday.

Meanwhile, the Swiss central bank unexpectedly cut its main lending rate by 50 basis points and said the economy may contract next year.

The central bank, led by Jean-Pierre Roth, lowered its three-month Libor target to 2 percent from 2.5 percent, it said in a faxed statement from Zurich. The SNB wasn't scheduled to decide on interest rates until Dec. 11.

“The global economic outlook has deteriorated more severely than anticipated, which will impact growth in Switzerland in the next few quarters,” the bank said.