European Central Bank delivers half-point cut; SNB acts
LONDON (MarketWatch) -- The Bank of England took drastic action Thursday in the face of a potentially severe and long-lasting economic contraction, slashing its key interest rate 1.5 percentage points to 3%.
The Frankfurt-based European Central Bank, which sets monetary policy for the 15-nation euro zone, and the Swiss National Bank also moved to cut rates by smaller amounts as home-grown economic woes and global financial turmoil stoke recession fears.
"There has been a very marked deterioration in the outlook for economic activity at home and abroad," the Bank of England said in a statement announcing the decision following the regular monthly meeting of the rate-setting Monetary Policy Committee.
The ECB lowered its key borrowing rate by 50 basis points, or half a percentage point, to 3.25%. The Swiss National Bank also moved to lower its key lending target by half a percentage point.
The ECB move "came as a disappointment in the end after far more aggressive action from the Bank of England, but there is still much more to come," said Jennifer McKeown, European economist at Capital Economics.
London stocks saw a temporary but significant rebound from session lows. The FTSE 100 stock index was 3.6% lower, in recent trade, but had lost as much as 4.7% ahead of the announcement.
The pound struggled to find direction on the move Sterling initially declined, then rebounded against the dollar. It's now relatively unchanged at $1.5889.
"Today's [BOE] action is bold and should be good news for borrowers," said Charles Davis, an economist at the Center for Economic and Business Research.
Although interbank spreads remain historically elevated, "banks should be able to pass on a noticeable amount of the 150 basis point cut," he said.
The euro fell versus the pound, declining 1.5% to 80.20 pence. Against the dollar, the single currency was off 1.4% at $1.2748.
European stocks remained weaker, but also moved off earlier lows. See full story.
Thursday's decision marks the largest-ever rate cut by the MPC, which was formed to oversee monetary policy-making when the Bank of England was granted independence in 1997.
Ahead of the Bank of England's move, financial markets had largely factored in a 75 basis point cut. Economists had expected a move of at least 50 basis points and a substantial minority had penciled in a reduction of a full percentage point to 3.5%.
In its statement, the bank highlighted the "most serious disruption" to the global banking system in almost a century.
The BOE noted that while measures to restore bank capital and improve funding and liquidity in several countries have started to ease tensions, credit availability for households and businesses "is likely to remain restricted for some time."
The bank noted that business surveys and reports by the BOE's regional agents indicated "a continued severe contraction in the near term."
"Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit," the statement said. "Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the U.K.'s main export markets."
The central bank said inflation pressures, which had previously kept the MPC on the sidelines, are quickly fading and will likely "drop back sharply" soon.
Data last month showed the U.K. economy shrank by 0.5% in the third quarter, following flat activity in the second quarter. The contraction was much sharper than expected.
The European Commission earlier this week predicted that Britain will bear the worst of a Europe-wide slump. Brussels now expects the U.K. economy to contract over the remainder of 2008 and to shrink by a further 1% over the course of 2009 before beginning to recover in 2010.
ECB President Jean-Claude Trichet is expected to detail the Governing Council's decision at his monthly news conference at 8:30 a.m.
The Swiss National Bank said it had lowered its three-month Libor target range by half a percentage point to 1.5% to 2.5%, with the intention of holding the rate at 2% "for the time being."
The global economic outlook "has deteriorated more severely than anticipated, which will impact growth in Switzerland in the next few quarters; growth in 2009 might even be negative," the SNB said in a statement.
