The European Central Bank unexpectedly cut interest rates in co-ordination with other central banks after the global credit crunch pushed borrowing costs to records and forced governments across Europe to bail out banks.
The ECB lowered its benchmark lending rate to 3.75 percent from 4.25 percent, effective from October 15, the Frankfurt-based bank said in a statement.
The move sparked immediate calls for Irish banks to pass on the 0.5 percentage point cut in rates to mortgage holders. If the full amount was passed on it would see an average €250,000 mortgage over 25 years drop by up to €90.
It's the first rate reduction by the ECB since June 2003. “The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,” the ECB said.
Central Bank Governor John Hurley said the rate cut “at a time of weakness in the Irish economy” should “help to reduce business costs, ease the repayment burden on mortgage holders, encourage investment and reduce strains in the financial markets.”
The eurozone economy is teetering on the brink of a recession as banks reel from the shortage of credit. ECB President Jean-Claude Trichet opened the door to lower borrowing costs last week when he said inflation pressures were diminishing and policy makers had discussed the rate-cut option.
“This is likely to prove only the start of a significant rate-cutting cycle,” said James Nixon, an economist at Societe Generale SA in London, who used to work as a forecaster at the ECB.
“Interest rates clearly have to come down quickly.''
The central banks of the UK, Canada, Sweden and Switzerland also reduced borrowing costs. Separately, China cut interest rates for the second time in three weeks.
The ECB, which raised rates as recently as July, has held off reducing borrowing costs because of its concern that faster inflation will trigger a wage-price spiral as workers seek compensation for the higher cost of living.
Britain earlier offered to pump at least £50 billion (€64 billion) into its biggest retail banks to help them survive the crisis.
British prime minister Gordon Brown said the global financial market had ceased to function after bad debts stemming from a collapse in the US housing market poisoned the system.
Hong Kong had earlier followed Australia's lead in slicing a full point off its interest rates amid increasingly strident calls for a coordinated, global monetary policy response.
The US approved a $700 billion package last week to rescue its ailing banks - although its stock market has continued to plunge - and governments across the globe are now pushing ahead with their own emergency measures.