ECB Cuts Rates, Following BoE, Swedish Riksbank

Prices are falling as oil prices tumbled by more than half from a record high in July.

European Central Bank President Jean-Claude Trichet addresses the media, after a meeting of the European Central Bank at the Belgian National Bank in Brussels, Thursday Dec. 4, 2008. (AP Photo/Yves Logghe)

(AP)

The British government has warned that deflation — falling prices — may now be a bigger threat as the economy is forecast to contract by more than 1 percent in 2009.

Trichet saw no deflation for the euro-zone. But demand in the euro area and across the world is "likely to be dampened for a protracted period of time," he said.

The euro-area economy entered into a recession this year when growth in both the second and third quarters shrank as investments plunged and spending froze. The euro economy is home to 320 million people and accounts for more than 15 percent of the world's gross domestic product.

Euro-zone central banks reduced their forecast for euro economic growth next year to between minus 1 percent and 0 percent. They saw only a very gradual recovery in the second half as global demand for euro goods picked up, led by emerging countries and oil exporters.

Economists said the cautious ECB had to be ready to go further and cut below 2 percent in 2009.

Aurelio Maccario of UniCredit said ECB board members had not backed a unanimous rate cut and "this tells of a council not yet fully aware of how serious and bad is the recession hitting the euro area."

Lowering interest rates is a powerful lever over the economy that can encourage companies and shoppers to borrow more, spend more and stoke growth — as long as banks are ready to lend.

Britain has called on banks to pass on full rate cuts to customers, but some lenders have tried to keep a margin for themselves to shore up their finances after several stormy months on credit markets.

Halifax, Britain's biggest mortgage lender, and Lloyds TSB promised Thursday they would pass the cut on. Three-quarters of lenders with a standard variable rate failed to give customers the full benefit of last month's 1.5 percent rate cut.

British Prime Minister Gordon Brown said this would be "a benefit to homeowners across the country." He told BBC radio that interest rates would stay at a relatively low level for some time now.