Frankfurt - The European Central Bank (ECB) delivered an historic rate cut Thursday with the ECB underscoring the rapid deterioration in Europe's economy by dramatically cutting back its growth projections. The 75-basis-points 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.
Releasing the ECB's latest so-called staff projections for inflation and economic growth, Jean-Claude Trichet told a press conference that inflation was diminishing but warned: "The economic outlook remains surrounded by exceptional uncertainty."
The projections underscored how the economic slump in the 15- member eurozone has gained momentum since the release of the last projections in September with the figures showing economic growth coming to a halt next year and inflation plunging 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, the eurozone economy is now likely to contract by 0.5 per cent or a range of between minus 1 per cent and zero, the staff projections say.
Growth should then gain ground again in 2010 coming in at between 0.5 per cent or 1.5 per cent. The midway point is a modest 1 per cent growth rate.
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 show annual eurozone inflation falling to 1.4 per cent in 2009 before edging up to 1.8 per cent in 2010. In September, the staff projections had forecast a 2.6- per-cent inflation rate for next year.
At his press conference, which followed the ECB's 21-head rate setting council meeting, Trichet said there had been "an intensifying and broadening of the financial turmoil" which has hit the global economy.
The ECB has now trimmed rates by an unprecedented 175 basis points since early October with analysts expecting the bank to press on with its rate-cutting cycle well into the new year in a bid spur economic growth.
"The current economic conditions warrant unprecedented action," said Klaus Baader, Merrill Lynch's London-based chief European economist.
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 since 1951. It also came in the wake of the London-based central bank's decision to cut rates four weeks ago by a massive 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 Thursday's ECB rate decision followed a slew of grim indicators, which have raised fears that the 15-member eurozone could be heading for a protracted economic downturn.
"The recession in the Eurozone seems to worsen by the day, while at the same time inflation is no longer a concern," said ING economist Carsten Brzeski.
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.
