Central banks cut rates to new low as recession worsens[fr][de] 

The ECB kept up its recent record pace of interest rate reductions, cutting by another 50 basis points to take its benchmark rate to 1.5%, the lowest in its 10-year history.

ECB President Jean-Claude Trichet said he could not exclude further cuts, but refused to be pinned down on how soon the ECB could cut again or how low rates could go.

Meanwhile, in what appeared to be a coordinated move, the Bank of England cut its interest rates to 0.5%, down from 1%. The BoE also announced it will "undertake a programme of asset purchases of £75 billion financed by the issuance of central bank reserves".

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

Trichet said the ECB's decision to cut rates was made in a consensus declaration, suggesting the bank's governing board was actually spilt on how much to cut rates by. He also gave scant new information on whether the bank was planning to employ additional economy-boosting measures, such as bond-buying like other central banks.

Asked if interest rates were now as low as they were likely to go, Trichet said: "We did not decide ex ante that this was the lowest point that we could attain. Further decisions will depend on facts, figures [...] I don't exclude that the policy rate could be changed and could go down."

ECB policymaker and head of the Bundesbank, Axel Weber, also talked about lowering rates, telling German television that ECB still had scope to cut despite the latest move.

Interest-rate sensitive two-year bond yields tumbled to a record low on Trichet's comments as markets bet on further cuts, while the euro extended losses against the US dollar, falling below $1.25.

Economists increased their bets that rates will soon be at 1%. A Reuters poll after the decision showed 58 of 66 economists expect another cut before mid-year, with most betting on a 50 basis point cut in April.

Dire forecasts

The big surprise for economists was a dramatic downgrade of the ECB's economic forecasts as the bank's staff slashed both growth and inflation expectations by a far larger margin than had been expected.

Trichet stressed inflation was now expected to undershoot the ECB's price stability goal of below but close to 2% both this year and next.

"Inflation rates have decreased significantly and are now expected to remain well below two percent over 2009 and 2010," he told a news conference. He added that the new figures were "reflecting the severe downturn in economic activity".

ECB staff predicted the recession-hit eurozone's economy could shrink by as much as 3.2% this year, more than three-times gloomier than its previous worst-case scenario and more pessimistic than most economists.

"The bank dramatically revised down its GDP and inflation forecasts. This makes it very likely that the ECB will cut the refi rate to 1.0%," said Commerzbank Chief Economist Joerg Kraemer.

The ECB also revealed that eurozone central banks faced a potential hit of more than 10 billion euros after being left with hard-to-sell assets following defaults on loans by Lehman Brothers and other banks.

Recession expected to deepen in 2009

New staff projections saw GDP contracting by 2.2 to 3.2% this year, compared with the previous estimate of -1.0 to 0.0%, giving a midpoint of a 2.7 percent fall.

The bloc's economy may grow again in 2010, it predicted, with staff forecasts ranging from a GDP drop of 0.7% to a rise of 0.7% next year, for a midpoint of zero. That was significantly lower than the 0.5-1.5 percent growth forecast made in December.

The current drop in inflation "reflects the severe downturn in economic activity," Trichet said. Inflation in the bloc was 1.2% in February, well under the ECB's target of below, but close to 2%.

Recent economic data had added "further evidence to our assessment that both global and euro area demand are likely to be weak in 2009. Over the course of 2010 [it] is expected to gradually recover," Trichet said.

Official data on Thursday confirmed the eurozone's economy suffered the worst quarter on record at the end of 2008. Other surveys have also shown confidence is at an all-time low, while the bloc shed more than quarter of a million jobs in January.

(EurActiv with Reuters)