British industry cheers after ECB slashes eurozone interest rates by half a point

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Businesses in both Britain and Continental Europe were celebrating yesterday after the European Central Bank slashed interest rates in belated recognition that the economy was in the grip of a severe downturn.

The ECB cut its main lending rate by a half-point to 2.75 per cent, saying economic growth was "sluggish" and would remain "subdued for some time to come".

The news overshadowed the Bank of England's widely expected decision to keep its base rate at a 38-year-low of 4 per cent for the 13th month in a row. UK rates have now been on hold for the longest period since 1959.

Wim Duisenberg, the ECB's president, said: "The evidence that inflationary pressures are easing has increased, owing in particular to the sluggish economic expansion. Furthermore, downside risks to economic growth have not vanished."

His comments delighted observers, who said it was a sign the bank would cut rates deeper next year if a recovery failed to materialise.

Mr Duisenberg said there was a "high degree of uncertainty" and listed a range of downside risks – geopolitical tensions, oil prices, stock prices, sluggish world growth, and persistent global imbalances.

"As it is hard to predict when this uncertainty will start to abate, it must be taken into account in the more medium-term outlook for growth," he said.

Ken Wattret, the euroland economist at BNP Paribas in London, said this was a clear signal the ECB had not ruled out further cuts but said inflation would hold the key to a further loosening of policy.

"If inflation falls, the ECB can cut again to boost the recovery," he said. "If not, then that's your lot."

Martin Essex, a senior economist at analysts Capital Economics, said there was "every chance" the ECB would cut rates to 2.25 per cent, which would be the lowest for either the eurozone or Germany, its main economy, since at least 1948.

The ECB's move was applauded by business groups and European governments, who had been calling for a cut for several months.

Gerhard Schröder, the Chancellor of Germany – the zone's weakest economy – said the cut was "an important signal of economic policy".

The BDI, an industry association, said the rate cut would help Germany. "We welcome the move," its spokesman, Michael Rogowski, said. "It represents at least a psychological boost in a difficult time."

The response was even more enthusiastic among British business organisations. The Confederation of British Industry said it would "help global growth".

The Engineering Employers' Federation, which three months ago said a cut by the ECB would be more important for its members than a UK cut, hailed the move as "decisive".

There was little reaction to the Bank of England's decision, which was trailed in its November Inflation Report when it warned about the risk of stoking the already unsustainable house price boom.

Since then Nationwide building society has said prices are rising at the fastest rate in 13 years. Halifax bank is today expected to echo that in its survey, which it passed to the Bank in time for yester- day's decision.

There was further ammunition for those arguing against a rate cut yesterday from the Recruitment and Employment Confederation's labour market survey.

It showed demand for workers was rising at its fastest rate for six months with wage growth accelerating at the same pace.

In a frenetic day for monetary policy, Denmark cut rates by a half point, Sweden cut by a quarter point, but the Swiss National Bank kept rates unchanged.