Bank of England, European Central Bank Make Aggressive Cuts in Key Interest Rates

By Howard Schneider
Washington Post Staff Writer
Friday, December 5, 2008

The Bank of England cut interest rates to World War II levels and the European Central Bank made the deepest rate cut in its 10-year history, as Europe's two main central banks moved yesterday to combat a deepening economic downturn.

The Bank of England cut its key interest rate by a full percentage point, from 3 percent to 2 percent. The bank kept its main rate at 2 percent from 1939 until 1951 and has never cut below that in its more than 300-year history. Yesterday's reduction follows an even larger 1.5 percentage point cut that Britain's central bank made last month.

In a statement, the bank's monetary policy committee said that the aggressive rate cuts were needed because steps taken so far have not reopened credit markets or done enough to support economic growth.

"Business surveys have weakened further and suggest that the downturn has gathered pace," the statement said. "Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult." It added that "it was unlikely that a normal volume of lending would be restored without further measures."

The announcement in London was followed by similar action in Brussels, where the European Central Bank said it would cut its main rate by a steeper-than-expected three-quarters of a percentage point, to 2.5 percent. The ECB serves as the central bank for the 15 nations that use the euro as a common currency.

In contrast to other European nations, Britain has acted faster and more aggressively in responding to the global financial crisis, engineering takeovers of troubled banks and financial institutions and instituting programs to try to dampen the effect of rising mortgage defaults.

The Bank of England has also been faster to follow the U.S. Federal Reserve in trimming interest rates in an effort to encourage borrowing and investment. The Fed's main interest rate stands at 1 percent following the most recent reduction.

But the European Central Bank yesterday took a step toward catching up. The bank has never cut by more than half a percentage point, preferring to go slowly to gauge the impact of its actions and ensure that inflation does not take hold.

Economic data, however, have shown a steadily eroding European economy. Recent reports have indicated that the region's economy is contracting overall, and several countries -- most notably Germany, with the largest economy in Europe -- are in recession.

"Global and euro-area demand are likely to be dampened for a protracted period of time," European Central Bank President Jean-Claude Trichet said at a news conference in Brussels. Since September "we have had a big change in the overall attitude," Trichet said. "There are a number of signs indicating that things have hardened."

He noted that the bank has trimmed rates by 1.75 percentage points in just over two months -- and that it might take time to measure what effect that is having.

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