The European Central Bank knocked down its benchmark interest rate by three-quarters of a percentage point, to 2.5 percent. The reduction is the largest in the bank’s 10-year history, capping a furious end to 2008, a span in which the bank nearly halved its key rate and provided ever-easier credit to ailing banks.
The magnitude of the bank’s efforts has made clear that it is worried about an economic downturn that is becoming broader and deeper by the day. The central bank was mapping out a strategy that is, in word and deed, less drastic than that of the Federal Reserve, at the epicenter of the crisis in the United States, but nonetheless precedent-setting.
The bank’s rates have not reached their lowest levels ever, but most economists expect they will do so early next year. The central bank president, Jean-Claude Trichet, made clear that the bank was considering that and more.
“If new decisions are needed, we will take new decisions,” Mr. Trichet said after a policy meeting in Brussels, later adding, “I exclude nothing.”
The Bank of England did its part as well Thursday, cutting rates by a full percentage point, to 2 percent, the lowest level in 50 years. When it next reduces rates, as most economists expect early next year, it will have brought borrowing costs to their lowest level in the institution’s 314-year history.
The European Central Bank accelerated its rate reductions as new projections from its staff suggested the economy of the 15-nation euro zone would be lucky to emerge from its current contraction in the second half of 2009.
Inflation, only six months ago a source of angst for the European Central Bank, will undershoot the bank’s goal of close to 2 percent in 2009, according to the forecasts.
“Price stability is important,” said Erik Nielsen, chief Europe economist at Goldman Sachs. “But what they have done over the past two months is huge for them.”
Across the English Channel, the Bank of England looked close to tossing out the rule book entirely, as it faced an economic crisis led by a free fall in the country’s flagship industry, financial services, where sweeping layoffs are underscoring how bad it could get.
Heavily indebted consumers who are now curbing spending are prompting a sharp rise in British unemployment, and the British central bank now seems ready to deploy its financial firepower unsparingly.
“They are pretty much signaling that they will go as low as zero,” said Jacques Cailloux, chief Europe economist in London at Royal Bank of Scotland. “They will do anything they can to prevent any sort of vicious spiral through the economy.”
The Swedish central bank delivered much the same message on Thursday.
It reduced its key lending rate by 1.75 percentage points, to 2 percent. Earlier in the day, the New Zealand central bank also lowered rates, underscoring the rapidly unfolding global easing of monetary conditions. Indonesia, which had not been expected to move, made a surprise cut Thursday in its main rate, by a quarter-point, to 9.25 percent.
Mr. Trichet distanced the European Central Bank from the Federal Reserve’s policy of “quantitative easing,” or pumping cash into the economy to pressure banks to lend.
“We are all doing what we trust is appropriate,” Mr. Trichet said. “We are not all in the same situation.”
Instead, what is shaping up in Europe is a policy that combines very low interest rates with less orthodox methods of persuading banks to step up lending to the rest of the economy. For example, the European Central Bank is considering changes to its deposit facility, which many banks are using to hoard their cash.
The European bank is reluctant to cut rates more quickly and promise to keep them there, as the Fed has effectively done, because it ties the bank’s hands in tightening credit later when the crisis has passed. Previous promises of easy money are commonly blamed for creating the housing boom whose collapse is at the core of the current crisis.
“The E.C.B. has no intention of inflating its way out of a debt bubble as the Fed is preparing to do,” said Elga Bartsch, chief Europe economist in London for Morgan Stanley.
Mr. Trichet also emphasized that central banks could not fight the crisis alone.
He criticized governments and the European Commission, the executive arm of the 27-member European Union, for not moving quickly enough to put in place the bank recapitalization and guarantee plans that were rushed through legislatures in October.
European antitrust authorities have come under fire for not approving the programs more quickly, and the central bankers pressured a top commission official at their meeting Thursday to accelerate the process.
The European Central Bank’s reluctance to outline a more forceful strategy for the future exposes it to the charge that it is underestimating the severity of the downturn, and that it is passing on opportunities to get ahead of it, analysts said.
Kenneth Rogoff, a former chief economist at the International Monetary Fund, said the bank was finding the shift difficult “after years of fighting the old battle” against inflation, but urged it to act more quickly.
“You build up anti-inflation credibility precisely so you can use it in an emergency,” Mr. Rogoff said. “This is an emergency.”
David Jolly contributed reporting from Paris, and Bettina Wassener from Hong Kong.
NewYorkTimes
