European central banks to cut rates to ward off recession


London/Frankfurt : Faced with a looming recession and rapidly falling inflation, Europe’s two leading central banks are expected to cut rates this week as monetary authorities around the world step up efforts to slash the cost of money.

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Indeed, analysts are predicting that the Bank of England (BoE) and the European Central Bank (ECB) will each announce Thursday at least 50-basis-point reductions in borrowing costs in a fresh bid aimed at shoring up economic confidence in Europe.

But as a measure of the speed of the economic deterioration threatening Britain, some analysts believe that the London-based BoE’s nine-member monetary policy committee could be forced to cut by as much as 100-basis-points this week.

Thursday’s widely expected cuts come just four weeks after British monetary authorities and the Frankfurt-based ECB joined a coordinated drive by central banks to lower rates.

“They are doing all they really can,” said Rainer Guntermann, senior economist with Dresdner Kleinwort in Frankfurt.

This week’s predicted ECB and BoE reductions follow a 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, South Korea, Taiwan, Israel and China have also reduced the cost of money in the run-up to Thursday’s BoE’s 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.

A reduction in borrowing costs this week “is not a certainty, it is a possibility” said ECB chief Jean Claude Trichet last week with the gloomy global economic outlook and falling inflation giving the central banks around the world room to move.

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 with 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 with inflation sinking to 2.2 percent next year.

Moreover, this week’s moves by the ECB and the BoE to ease monetary policy are expected to form part of a further round of rate cuts in the coming months.

“The prospect of further rises in unemployment in the eurozone and further steep falls in inflation, will allow the ECB to cut rates aggressively,” said ING Bank economist Martin van Vliet.

Rates currently stand at 3.75 percent in the 15-member eurozone and 4.5 percent in Britain.

But by around the middle of next year they could be as low as two percent with the recent retreat of inflation now resulting in talk about the risks posed to the world economy by deflation.

Currently at over 4 percent, inflation in Britain is expected to tail-off in line with the falling oil price, the dual target of stimulating the flagging economy and supporting a crumbling housing market has taken priority in the British debate.

There is little sign that inter-bank lending has picked up significantly since the massive bail-out of early October, coupled with a clear reluctance by banks and building societies to pass on central bank rate cuts to the consumer.

While it is expected the BoE will cut rates to four percent Thursday, pressure has been growing for the bank to “stop tinkering” and go for a one percent cut.

Gloomy figures on industrial output, unemployment and a quickly-crumbling housing market have accelerated the calls for the bank to go further. However, the BoE could prefer to cut the rate in stages, possibly down to 3 percent by Christmas.

Property prices look set to fall by 25 percent, with the average home set to tumble from a high of just below 200,000 pounds to a low of around 150,000 pounds by the end of next year, according to the Centre for Economics and Business Research (Cebr).

“Now that the financial crisis turns into an economic crisis with rising unemployment and falling household incomes, we could see house price falls starting to accelerate again,” said Ben Read, managing economist at Cebr.

Howard Archer, chief European economist at Global Insight, said there was a “compelling” case for the central bank to cut rates by a full percentage point.

The Federation of Small Businesses was among organizations calling for a 1-per cent cut, which he said would force banks to pass on the benefits to borrowers.

The Home Builders Federation, the Confederation of British Industry (CBI) and the British Chambers of Commerce have all backed calls for a significant cut in the key lending rate this week.