ECB cuts rates, following BoE, Swedish Riksbank

Europe's central banks slashed borrowing costs aggressively Thursday to try and ward off a long recession triggered by the financial crisis.

Their rate cuts tried to counter a slowdown that looks longer and deeper than initially feared - but they are getting close to the limit on how low they can go.

The European Central Bank cut its interest rate by the biggest amount in ten years, the Bank of England dropped to the lowest level since 1951 and Sweden's Riksbank made a new record with a surprise 1.75 percent cut. Britain and Sweden cut their rates sharply to 2 percent.

The ECB lowered the key borrowing rate for the 15 nations that use the euro to 2.5 percent from 3.25 percent - a move mimicked by Denmark's central bank whose currency is linked to the euro.

ECB President Jean-Claude Trichet refused to discuss any future rate cuts - such as speculation of another cut to 2 percent in January - but acknowledged that the bank needed to "beware of being trapped on nominal levels that would be much too low."

"I say nothing for January. Nothing," he told reporters at a Brussels press conference. "We are looking at the situation as cautiously and technically as possible."

Sweden said it expected to hold rates at 2 percent for the coming year.

But many economists expect the British interest rate to fall further in the coming months to 1 percent or even zero. That would take the rate to an all-time low - rates have never fallen below 2 percent since the Bank of England was founded in 1694.

"In order to prevent the recession from turning into a depression, the monetary policy committee needs to cut interest rates to levels never seen before," said Roger Bootle, an economic adviser at Deloitte bank. "The latest data suggest that the recession is deepening."

James Knightly, an economist at ING bank, said there was a "very real risk that the bank rate will actually end up at zero next year" because inflation was not a problem for Britain.

Prices are falling as oil prices tumbled by more than half from a record high in July.

The British government has warned that deflation - falling prices - may now be a bigger threat as the economy is forecast to contract by more than 1 percent in 2009.

Trichet saw no deflation for the euro-zone. But demand in the euro area and across the world is "likely to be dampened for a protracted period of time," he said.

The euro-area economy entered into a recession this year when growth in both the second and third quarters shrank as investments plunged and spending froze. The euro economy is home to 320 million people and accounts for more than 15 percent of the world's gross domestic product.

Euro-zone central banks reduced their forecast for euro economic growth next year to between minus 1 percent and 0 percent. They saw only a very gradual recovery in the second half as global demand for euro goods picked up, led by emerging countries and oil exporters.

Economists said the cautious ECB had to be ready to go further and cut below 2 percent in 2009.

Aurelio Maccario of UniCredit said ECB board members had not backed a unanimous rate cut and "this tells of a council not yet fully aware of how serious and bad is the recession hitting the euro area."

Lowering interest rates is a powerful lever over the economy that can encourage companies and shoppers to borrow more, spend more and stoke growth - as long as banks are ready to lend.

Britain has called on banks to pass on full rate cuts to customers, but some lenders have tried to keep a margin for themselves to shore up their finances after several stormy months on credit markets.

Halifax, Britain's biggest mortgage lender, and Lloyds TSB promised Thursday they would pass the cut on. Three-quarters of lenders with a standard variable rate failed to give customers the full benefit of last month's 1.5 percent rate cut.

British Prime Minister Gordon Brown said this would be "a benefit to homeowners across the country." He told BBC radio that interest rates would stay at a relatively low level for some time now.

The Bank of England said Thursday the downturn had gathered pace, with consumer spending and business investment stalling while residential investment has fallen.

House prices fell at their fastest monthly rate in 16 years during November, Halifax said. New car sales also fell, by 37 percent from a year earlier.

---

Associated Press writers Matt Moore in Frankfurt, Malin Rising in Stockholm and Jan Olsen in Copenhagen contributed to this story.