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European Central Bank Cuts Rates

  • December 11th, 2008
  • Posted by Daniel Challis

The European Central Bank (ECB) has cut interest rates by 75 basis points to 2.5% to try and restore consumer borrowing confidence and stem the flow of a spreading recession.

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The decision to cut borrowing rates was announced last Friday in Frankfurt, and is the third decision in as many months to try and remedy an ailing European economy…

ECB LEADS THE WAY

The ECB has led the charge for the rest of the 15-nation Euro-zone central banks to drop their interest rates.

The Bank of England was one of the first to follow suit by cutting its benchmark rate by a percentage point to 2 percent, following a one-and-half-point reduction earlier in the month.

The Danish and Swedish central banks cut their key rates to 4.25 percent and 2 percent respectively.

The Swedish Riksbank’s unprecedented 175 basis points cut was almost double what the market was anticipating and comes amidst the impact of a global economic downturn on the country’s export-based economy.

The Riksbank said in a statement last Friday the current rate is expected to remain at this level over the coming year, which will mean interest available to Swedish savers will be just 2 percent.

“A large reduction in the interest rate and the interest rate path is necessary to dampen the fall in production and employment and to attain the inflation target of 2 per cent,” the Riksbank said.

The ECB is predicting weak growth for the Euro-region’s economy — 0.5 % GDP (Gross Domestic Product) growth in 2009 and 1.5% in 2010.

ECB president Jean-Claude Trichet said in a press conference in Brussels that tensions have increasingly spilled over from the financial sector to the real economy, which in turn is having an adverse effect on the world economy.

“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,” Mr Trichet said.

Trichet also denied the possibility of another rate cut by next month amidst conjecture the ECB could cut its benchmark lending rate to as low as 1.5 percent to boost the Euro-zone economy even further.

FRANCE’S STIMULUS PACKAGE

France’s President Nicolas Sarkozy made €26 billion (A$50.95-billion; Dcerates.com, 11.12.08) available on the same day in a bid to stimulate the country’s faltering economy.

The rescue package is designed for investment into major infrastructure projects as well as industry.

“In the current exceptional circumstances, we have a historic responsibility to improve France’s facilities, infrastructure, universities and research,” Mr Sarkozy said.

The package is also designed to create new jobs, with unemployment in France currently at 7.7 %.

France has so far avoided formal recession as it currently sits on 0.5 % growth recorded last month.

President Sarkozy will be at the European summit in Brussels over the next two days where he will meet the other European leaders and support a €200-billion (A$396.63-billion; Dcerates.com, 11.12.08) economic stimulus package for the EU (see EUAustralia, “Crisis Meeting”, 11.12.08).

Reference:

Jean-Claude Trichet, President of the ECB, “Introductory Statement with Q&A”, Brussels, 04.12.08 – http://www.ecb.int/press/pressconf/2008/html/is081204.en.html#qa, (10.12.08).

The Sveriges Riksbank, “Repo rate cut to 2 per cent”, Stockholm, 04.12.08 – http://www.riksbank.com/templates/Page.aspx?id=29849, (10.12.08).

Times Online, “Sarkozy promises €26bn state aid package for French economy”, Paris, 04.12.08 – http://www.timesonline.co.uk/tol/news/world/europe/article5288578.ece, (10.12.08).

Picture: European Central Bank, Frankfurt.