Europe's interest rates to be cut again as recession bites

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Central bankers across Europe and in the UK are set to cut interest rates again when they meet next week as the financial crisis pushes the Continent deeper into recession.

Fears of lower interest rates, coupled with bad news on the UK economy, sent the pound on its biggest one-day fall in 37 years and to a six-year low against the dollar, a bigger fall than on Black Wednesday in 1992. Figures from the Office for National Statistics showed the economy shrank by an enormous 0.5 per cent in the third quarter of the year – about twice the amount forecast and the biggest fall since 1990. Worst hit were the hotels and restaurant sector, manufacturing and construction. The FTSE 100 index fell to its lowest level for five years, as investors sold fearing for future profits.

Policymakers are expected to move swiftly to lower rates by at least half a per cent when they next meet. The Governor of the Bank of England, Mervyn King, and the Monetary Policy Committee meet next Wednesday to discuss rates, and will come under pressure for big cuts of up to 2 per cent. Mr King indicated last week that slower growth will encourage further cuts despite 5.2 per cent annual inflation for September, well above the 2 per cent target, but he is likely to resist big cuts.

In Europe, Jean-Claude Trichet, the head of the European Central Bank, which sets policy for the 15 eurozone countries, has also signalled that the ECB is ready to cut rates again, fuelling further falls in the euro last week. Ghastly news from companies across Europe undermined investor confidence still more. Fiat and Daimler are both forecasting cuts in this year's earnings. Volvo sold just 115 new lorries across the Continent compared with 41,970 in the third quarter of 2007. Its worldwide sales fell by 55 per cent in the past three months, while Scania, in which Volvo has a controlling stake, saw truck orders collapse by 69 per cent.

JCB, the UK construction vehicle firm, said its workers had agreed salary cuts to protect jobs, while in France, Peugeot Citroë*has slashed production, warning sales will fall by as much as 17 per cent in Europe.