The European Central Bank (ECB) and the Bank of England moved yesterday to avert a global recession with larger than anticipated interest rate cuts which are expected to be followed by further reductions if global economic weakness persists.
The ECB cut interest rates by half a percentage point to 3.25 per cent, its lowest since February 2000. Some economists predicted that euro zone rates could fall to as low as 2.5 per cent by next spring.
Coming on the heels of the US Federal Reserve's half-point interest rate cut on Tuesday and yesterday's announcement by the Bank of England of similar cuts, the move fuelled optimism on Wall Street that this just might be the combination that finally does the trick to shore up global economies. Stock markets reacted positively to the ECB's move.
Analysts said the interaction of interest rate cuts, tax cuts and a planned $100 billion (€111 billion) stimulus package to be launched by the US Congress before the end of the year could give a boost to the key US economy in the first half of next year.
"The central banks in Europe are finally catching up with the US and realising that fighting recession is more important than fighting inflation", said Mr Edgar Peters, chief investment officer of PanAgora Asset Management.
The cuts will be good for homeowners, who will benefit from cheaper mortgages. Savers, how-ever, may have their rates cut. AIB and Ulster Bank passed on the full half-point cut for all customers yesterday. Borrowers with a £100,000 loan over 20 years will see repayments fall by £26.76 a month with an AIB loan, now the cheapest variable rate on the market.
The ECB's cut is likely to be the last before Christmas. However, analysts expect at least another quarter percentage point fall early in the new year. Further cuts will be dictated by the extent of or lack of economic recovery in both the US and Europe. A two-month break in interest rate adjustments will also allow the ECB to concentrate on the euro changeover.
The ECB president, Mr Wim Duisenberg, said that the bank did not yet expect a recession in the euro zone but warned that growth could get close to zero. The ECB is convinced that inflationary dangers have passed. It will publish its medium-term inflation expectations in a few weeks amid indications that a rate of 1.5 per cent is now expected. That is well below its 2 per cent ceiling and allows room for interest rate cuts.
The ECB was also clearly rewarding politicians who have kept conspicuously quiet in recent days after the bank made it clear that political pressure for a cut would be counter-productive. The bank will in future decide on interest rates once a month instead of twice.