- The Washington Times - Friday, November 7, 2008

In the face of rapidly deteriorating economic conditions and overly tight credit markets, European central banks slashed their short-term target interest rates Thursday.

The Bank of England cut its key rate by 1.5 percentage points, reducing it to 3 percent, its lowest level since 1955.

For the second time in less than a month, the European Central Bank (ECB) cut its policy rate by half a point, taking it down to 3.25 percent and signaling that additional cuts were on their way. “I don’t exclude that we will decrease rates again,” ECB President Jean-Claude Trichet said at a news conference in Frankfurt, Germany.

Switzerland’s central bank reduced its target rate by half a point as well.

Britain’s “already very weak economy has clearly suffered a serious relapse recently and is now in grave danger of suffering a prolonged, deep recession,” said Howard Archer, chief British and European economist for IHS Global Insight, an economic-consulting firm. “The fact that the Bank of England had never previously moved interest rates by more than half a point in any direction since the Monetary Policy Committee was set up in 1997 highlights the very serious situation that the [British] economy is in.”

Late last month, the U.S. Federal Reserve cut its key short-term interest rate by half a point, reducing it to 1 percent, which matched its lowest rate in more than half a century. Earlier in October, after the bankruptcy of Lehman Brothers investment bank froze credit markets around the world and precipitated the biggest weekly plunge since 1933 in the Standard & Poor’s 500 stock index, the Fed coordinated emergency rate cuts of half a point with the Bank of England and the ECB.

As recently as September 2007, the Fed’s target interest rate was 5.25 percent.

While there has been recent evidence that credit markets have begun to thaw, the central banks’ rate cuts have not prevented the economic situation around the world from deteriorating.

On the credit-market front, the three-month, dollar-denominated London interbank offered rate (LIBOR) has declined from 4.82 percent on Oct. 10 to 2.39 percent Thursday. LIBOR is important because it is a base interest rate to which trillions of dollars in loans are tied, including many U.S. adjustable-rate mortgages.

Yet the outlook for industrial economies remains bleak. On Thursday, the International Monetary Fund (IMF) predicted that the British economy would decline 1.3 percent in 2009, the U.S. economy will contract by 0.7 percent next year, the economy of the 15-nation euro region will shrink 0.5 percent, and the Japanese economy will decline 0.2 percent.

“Markets have entered a vicious cycle of asset de-leveraging, price declines and investor redemptions,” the IMF said Thursday. “Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth.”

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