Europe's banks cut rates in harmony

Click to follow
The Independent Online
EUROPE'S CENTRAL bankers delivered an unprecedented synchronised cut in interest rates across the Continent yesterday in response to fears of a global economic slowdown.

It was in effect the first decision of the new European Central Bank, ahead of the launch of the euro on 1 January. The move means the Bank of England is now firmly expected to cut UK loan rates for the third time in three months after next week's meeting of its Monetary Policy Committee.

The unexpected European announcement therefore got a warm welcome from business and the City. Adair Turner, director-general of the Confederation of British Industry (CBI), said: "It is the right action since inflationary pressures are minimal across Europe and the real danger is from a slowdown in growth."

Share prices in London surged ahead in anticipation of a pre-Christmas cut from the Bank of England. The Bank has already knocked 0.75 percentage points off rates, taking them to 6.75 per cent, and a further move would cut the cost of mortgages again.

After yesterday's reduction of 0.3 percentage points, European interest rates stand at 3 per cent - except in Italy, where they have fallen to 3.5 per cent.

But the decision, led by Germany's Bundesbank, was not all good news. It reflected the bankers' concern about the risk of a serious economic downturn just as the euro is launched.

Michael Lewis, an economist at Deutsche Bank, said: "This was an unprecedented step. There is a slowdown under way."

However, Hans Tietmeyer, the Bundesbank's president, denied that the bank had been arm-twisted by politicians.

Both Oskar Lafontaine, Germany's new Finance Minister, and his French counterpart Dominique Strauss-Kahn, have made no secret of their desire to see interest rates fall. Neither wants the new European currency to be born into a serious recession on the Continent.

There was even greater concern in the financial markets about whether the series of interest rate cuts meant central bankers had reason to expect a fresh bout of global financial turbulence.

Yesterday the Brazilian stock market plunged after it became apparent that the country was unlikely to meet the terms of a new International Monetary Fund rescue package for its troubled economy.

The failure of the package might threaten further chaos of the kind that toppled Long Term Capital Management, a speculative investment fund, in September.

Economists said flagging business confidence and pronounced weakness in European manufacturing amply justified the co-ordinated cuts in European interest rates.

"It's certainly not all gloom and doom, but what we're seeing is that the global slowdown is having a severe impact on goods-producing industries," said Ellen van der Gulick, an economist with JP Morgan in London.