Meeting in Brussels on Thursday (4 December), the ECB Governing Council decreased rates by 75 basis points to 2.50%, its largest single cut ever amid predictions that recession will take hold next year.
According to the ECB's economic analysis, Gross Domestic Product (GDP) is forecast to contract by "between -1.0% and 0.0% for 2009". "Both global demand and euro area demand are likely to be dampened for a protracted period of time," said Jean-Claude Trichet, president of the ECB.
Eurozone inflation fell heavily from 3.2% in October to 2.1% in November, according to Eurostat estimates, fuelling deflationary fears in Europe (EurActiv 28/11/08).
In a coordinated move, the Bank of England (BoE) slashed its interest rates by one further percentage point to 2%, its lowest level in 50 years. "In the United Kingdom, business surveys have weakened further and suggest that the downturn has gathered pace," the Bank said in a statement.
Sterling fell sharply in anticipation of the BoE's decision on Thursday, hitting a record low against the euro of below 1.15 EUR at midday.
Just hours earlier, the Swedish central bank had bolstered European markets by announcing a surprise rate cut. The cut, by 175 basis points, to 2% was bigger than analysts had expected.
Commenting on the ECB's decision in the afternoon, Trichet warned about "the ongoing period of weak economic activity and high uncertainty about the economic outlook," which called for short term action and "necessary flexibility" with budget deficits.
But he sounded a cautious note, saying it was "crucial that discipline and a medium-term perspective are maintained, taking fully into account the consequences of any shorter-term action on fiscal sustainability".
French President Nicolas Sarkozy yesterday revealed a 26 billion euro stimulus plan to boost the economy via a "massive effort on investment" in areas such as energy infrastructure projects. The move is expected to send France's budget deficit close to 4%, taking advantage of the flexibility offered by the EU's Stability and Growth Pact.
"Where room for manoeuvre exists, additional budgetary measures could be effective if they are timely, targeted and temporary," Trichet said, echoing previous statements from the European Commission.
