The European Central Bank cut interest rates by 75 basis points today, its biggest ever move as inflation plummets and the euro zone economy sinks deeper into recession.
The move takes the ECB's main refinancing rate to 2.50 per cent, its lowest in nearly two-and-a-half years and marks the third cut in barely two months amid signs that the financial crisis is biting hard into the real economy.
The majority of economists had expected a smaller, 50 basis point cut although a significant minority forecast a bigger move. Financial markets had priced in a 75 basis points reduction.
Other central banks have taken even more aggressive moves, with the Swedish central bank cutting by a record 175 basis points while the Bank of England cut rates by 100 basis points to 2 per cent, their lowest level since 1951.
Labour Party deputy leader Joan Burton welcomed the cut but said she was concerned at reports the financial institutions may not pass on the cut in full.
The Irish Small & Medium Enterprises’ Association also called for the cut to be passed on by the banks.
AIB, Bank of Scotland (Ireland) and Halifax have all said they will pass on the full 0.75 per cent ECB rate cut to variable rate mortgage customers.
ECB President Jean-Claude Trichet explained the Governing Council's decision at a news conference at 1.30pm during which he played down the risk of deflation.
ECB staff predicted inflation would fall below the bank's 2 per cent ceiling in 2009, but Mr Trichet said a sharp drop in inflation would be only temporarily.
"Inflation rates are expected to be in line with price stability over the policy-relevant horizon, supporting the purchasing power of incomes and savings," he told the news conference. "The decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity."
Euro zone inflation plunged by 1.1 percentage points in November, the biggest drop since the euro zone was created 10 years ago, to 2.1 per cent year-on-year. This was only just above target as the ECB aims to keep inflation below, but close to, 2 per cent.
"Largely related to the effects of the intensification and broadening of the financial turmoil, both global demand and euro area demand are likely to be dampened for a protracted period of time," Mr Trichet added.
Some economists have talked about the threat of deflation hitting the euro zone, where consumer prices fall across the board for a lengthy period, and can hit economies severely But Trichet stressed that falling inflation rates did not equate to deflation.
The euro zone economy already fell into recession at mid-year. Mr Trichet revealed that new staff projections sharply revised down growth in the 15-nation region to 0.8-1.2 per cent, for a midpoint of 1.0 per cent, for the year as whole.
The ECB also cut the rates on its overnight facilities by 75 basis points. Funds borrowed from its marginal lending facility would now attract an interest rate of 3 per cent and overnight deposits will pay 2 per cent.
Reuters