Interest rates are slashed in Europe

By Chris Giles in London, Ralph Atkins in Frankfurt and,Krishna Guha in Washington

Published: November 7 2008 02:00 | Last updated: November 7 2008 02:00

Interest rates were slashed across Europe yesterday as the continent's central bankers decided the outlook for their economies had taken a decisive turn for the worse.

The Bank of England cut rates by 1.5 percentage points to 3 per cent, bringing the official rate to its lowest level in 53 years. The cut was three times bigger than any seen since the central bank's monetary policy committee was established in 1997.

The European Central Bank cut official borrowing costs by half a percentage point to 3.25 per cent and Jean-Claude Trichet, ECB president, said he would not "exclude" a further cut in December.

The Czech central bank also unveiled a much larger than expected three-quarter percentage point cut, while the Swiss National Bank said it was lowering interest rates.

Equity markets slumped amid fears that global weakness would hit corporate profits. The S&P 500 index fell 5.03 per cent, after losing 5.27 per cent on Wednesday. London's FTSE 100 index closed 5.7 per cent lower, while German and French equities both fell more than 6 per cent.

The International Monetary Fund published an emergency update of its forecasts, predicting the rich world's economies would shrink by 0.3 per cent next year, the first contraction since the second world war. Last month it projected 0.5 per cent growth.

The IMF recommended that the US, Europe and China raise public spending and cut taxes.

The number of Americans filing new claims for unemployment benefits remained more than 50 per cent higher than before the financial crisis hit in 2007 as the insured unemployment rate climbed to its highest level since February 1983.

Kevin Warsh, a Federal Reserve governor, said there were "notable signs of improvement" in credit markets, but added that financial markets "remain strained" and would remain so while financial sector business models were still in "substantial flux."

In what may be a signal that the flurry of policy interventions is drawing to a close, he said "a dose of patience" may be required. "New prescriptions, however well-intentioned, can prove unsettling to a patient who is searching to find his footing."

The Bank of England said its dramatic move was a response to tightening credit conditions; evidence of a "severe contraction" in the economy over coming months; and a dramatic extinction of inflationary pressure.

The size of the cut in UK interest rates appeared to have taken the ECB by surprise, but Mr Trichet played down differences in approach.