ECB Cuts Rates, Following BoE, Swedish Riksbank

Europe's central banks slashed borrowing costs aggressively Thursday to try and ward off a long recession triggered by the financial crisis.

European Central Bank President Jean-Claude Trichet addresses the media, after a meeting of the...

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. The European Central Bank has cut its benchmark interest rate to 2.5 percent, following similar moves by central banks across the continent. (AP Photo/Yves Logghe)

(AP)

Their rate cuts tried to counter a slowdown that looks longer and deeper than initially feared — but they are getting close to the limit on how low they can go.

The European Central Bank cut its interest rate by the biggest amount in ten years, the Bank of England dropped to the lowest level since 1951 and Sweden's Riksbank made a new record with a surprise 1.75 percent cut. Britain and Sweden cut their rates sharply to 2 percent.

The ECB lowered the key borrowing rate for the 15 nations that use the euro to 2.5 percent from 3.25 percent — a move mimicked by Denmark's central bank whose currency is linked to the euro.

Related

Automakers Park Future of Industry at Capitol Hill Hearings

Detroit's Hybrid Hopes: But Who Wants 'em?

ECB President Jean-Claude Trichet refused to discuss any future rate cuts — such as speculation of another cut to 2 percent in January — but acknowledged that the bank needed to "beware of being trapped on nominal levels that would be much too low."

"I say nothing for January. Nothing," he told reporters at a Brussels press conference. "We are looking at the situation as cautiously and technically as possible."

Sweden said it expected to hold rates at 2 percent for the coming year.

But many economists expect the British interest rate to fall further in the coming months to 1 percent or even zero. That would take the rate to an all-time low — rates have never fallen below 2 percent since the Bank of England was founded in 1694.

"In order to prevent the recession from turning into a depression, the monetary policy committee needs to cut interest rates to levels never seen before," said Roger Bootle, an economic adviser at Deloitte bank. "The latest data suggest that the recession is deepening."

James Knightly, an economist at ING bank, said there was a "very real risk that the bank rate will actually end up at zero next year" because inflation was not a problem for Britain.