The surprise move raised to fever pitch expectations that the Bank of England will reduce UK interest rates again after next week's meeting of its Monetary Policy Committee. Two new business surveys published yesterday indicated that the economic slowdown has spread beyond manufacturing into retailing and services.
European central bankers were responding to fears of a global recession in the wake of the autumn's financial turbulence. Yesterday's announcements brought to 54 the number of central banks worldwide that have cut the cost of borrowing since the beginning of October.
The financial markets were delighted by this latest step in what clearly emerges as a co-ordinated series of moves by central banks since October's Group of Seven meeting in Washington. "Interest rates are coming down globally at some speed, and it is necessary that they do," said Michael Hughes, a director of Barings Asset Management.
The FTSE-100 index ended the day nearly 59 points higher at 5,566.1. But Wall Street was overshadowed by fears over Brazil, with the Dow Jones index 74 points lower at 8,990.14 by late morning.
All of the Euro zone countries except Italy now have interest rates at 3 per cent, with Italy still at 3.5 per cent.
Hans Tietmeyer, Bundesbank president, said the move reflected economic conditions and cleared the ground for the new European Central Bank. But he denied the bankers were responding to pressure for a rate cut from politicians, including Oskar Lafontaine, German's forceful new finance minister.
Economists agreed that the move was justified by the prospect of an economic slowdown. "It reflects a collapse in consumer confidence across Europe," said Michael Lewis of Deutsche Bank.
The latest evidence of slowdown in the UK was provided by news that retailers last month suffered their biggest fall in confidence in the 15 years they have been surveyed by the Confederation of British Industry. While 36 per cent said sales in the past three months had been higher than a year earlier, 45 per cent said they were down.
The CBI said some sectors had stayed robust, and retailers expected business to pick up for Christmas. But it warned that volumes might grow only at the expense of profit margins.
A separate survey from the Chartered Institute of Purchasing and Supply showed the first fall in activity in the service sector, which makes up two-thirds of the economy. "This points to growth very much grinding to a halt," said Adam Cole of HSBC Markets, although he said the UK was still on course for a soft landing.
The CBI welcomed the European interest rate cuts and called on the Bank of England to follow up with a half point reduction in UK rates to 6.25 per cent next week. "Inflationary pressures are minimal across Europe and the real danger is from a slowdown in growth," said Adair Turner, director general.
Marian Bell, an economist at the Royal Bank of Scotland, warned: "The Bank should cut rates next week but it could be too late to prevent a recession next year."