ECB warns of further shocks after rate cut

THE EUROPEAN Central Bank announced a rate cut of half a percentage point to 3.25 per cent yesterday in a bid to stimulate economic growth in the euro zone area.

But the move failed to stop European stocks from continuing their fall yesterday afternoon as the bank's president, Jean-Claude Trichet, warned of more financial shocks to come. "The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead," he said after a meeting of the bank's governing council in Frankfurt.

Mr Trichet said further rate cuts could be on the way and urged banks to lend money. "We expect the banking sector to make its contribution to restore confidence." The governing council discussed cutting rates by 75 basis points but, "after having checked and discussed the pros and cons of those different options, we decided unanimously that it was appropriate to decrease by 50 basis points", he said.

The rate cut follows the co-ordinated rate cut on October 8th with the US Federal Reserve and five other central banks in an attempt to halt a global slowdown.

Mr Trichet said inflation, which peaked at 4 per cent over the summer, was now easing and was expected to drop further next year in line with the decline in energy and food prices. "The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009," he said. Inflation in October fell to 3.2 per cent but is off the ECB target of 2 per cent.

The ECB rate cut followed the Bank of England's cut of 150 basis points. The Swiss National Bank yesterday cut its interest rate by 50 basis points to 2 per cent, only the second cut since March 2003. Denmark's central bank cut rates by 50 basis points to 5 per cent, reversing an increase just two weeks ago. The Czech Republic's central bank cut its rate by 75 basis points to 2.75 per cent.

The cuts come as the European Commission this week predicted a sharp drop in the EU's GDP growth in 2009, falling investment and consumption and a rise in unemployment.

EU leaders will meet in Brussels today to discuss how to reform the global financial system to prevent such a crisis from happening again. The informal summit is intended to agree a common EU position ahead of Thursday's summit in Washington of the G20 industrialised and emerging economies. But while EU member states broadly agree on the need for greater transparency on the financial industry and reform of the international financial institutions, such as the International Monetary Fund, different views exist on regulation of the industry. In addition to a position paper by France, which currently holds the EU's rotating presidency, on how to reform the global system, there are British and Dutch papers.

The French paper to be submitted today is a revised version following concerns raised by finance ministers on Tuesday over a proposal which some said could signal a move towards global economic governance.