Frankfurt - The European Central Bank (ECB) delivered an unprecedented 75 basis points cut in interest rates Thursday, underscoring the dramatic deterioration in Europe's economy. The reduction was the biggest rate cut since the notoriously cautious ECB took charge of eurozone monetary policy about ten years ago and brought borrowing costs in the currency bloc down to 2.5 per cent.
"The current economic conditions warrant unprecedented action," said Klaus Baader, Merrill Lynch's London-based chief European economist with analysts expecting the ECB's 21-head rate-setting council to press on with its rate-cutting cycle well into the new year.
The ECB has now trimmed rates by 175 basis points since it joined the world's other leading central banks in early October as part of coordinated moves to help spur economic growth by cutting the cost of money.
Convening in Brussels at one of its regular out-of-town meetings, the Frankfurt-based ECB's announcement followed the decision by the Bank of England (BoE) to lop another 100 basis points off UK rates and Sweden's national bank's move to slash rates by 175 basis points.
Thursday's announcement by the BoE's nine-member monetary policy committee brought British rates down to 2 per cent, their lowest level since 1951. It also came in the wake of the London-based bank's decision to cut rates four weeks ago by a dramatic 150-basis-points.
Faced with rapidly slowing economic growth central banks have stepped up moves to cut the cost of borrowing.
The US's key rate now stands at 1 per cent after the Federal Reserve reduced the cost of borrowing in the world's biggest economy by 325 points this year in a series of rapid-fire cuts.
Meanwhile, China has delivered the biggest reduction in borrowing costs in the country since the Asian financial crisis a decade ago with Australia's Reserve Bank this week announcing its fourth rate cut in as many months this month.
At the same time, Switzerland's normally conservative national bank last month chopped 100 basis points off rates.
Economists had been divided in the run-up to Thursday's ECB meeting on the size of the reduction with some believing that slumping economic growth and dwindling inflation would result in the bank slashing rates by even 100 basis points.
However, the majority of economists had predicted that the ECB would stick to past practice and not reduce borrowing costs by more than 50 basis points at one meeting.
But then Thursday's ECB rate decision followed a slew indicators, which have raised fears that the 15-member eurozone could be heading for a protracted economic downturn.
Economic sentiment in the eurozone tumbled to a 15-year low in November, a key survey released last week showed, after the currency bloc tipped into recession in the third quarter.
The sharp economic contraction is already starting to filter through to the eurozone's jobs market, with unemployment posting its biggest monthly increase in October surging to reach its highest level in nearly two years of 7.7 per cent.
At a press conference set down for later on Thursday, ECB chief Jean-Claude Trichet was to release the bank's latest so-called staff projections for inflation and economic growth.
These are expected to underscore that the economic slump in the eurozone has gained momentum since the release of the last projections in September with the figures tipped to show economic growth coming to a halt next year amid a plunge in inflation to below the ECB's annual two per cent target.
Instead of growing by 1.2 per cent as set out in the September staff projections, Thursday's figures are expected to show the eurozone economy contracting by 0.5 per cent.
Data released last week showed annual eurozone inflation chalking up its biggest fall in almost 20 years in November to drop to a lower-than-forecast 2.1 per cent from 3.2 per cent in October.
As a result, Thursday's staff projections will say annual eurozone inflation fell to 1.5 per cent in 2009, analysts say. In September, the staff projections had forecast a 2.6-per-cent inflation rate next year.
