Friday, Dec 05, 2008
The European Central Bank has slashed interest rates by three-quarters of a point to 2.5pc in the boldest move since the launch of monetary union and hinted at revolutionary action to head off a severe slump next year as the economic crisis ravages the car, steel, and machine tool industries.
“Tensions have increasingly spilled over from the financial sector to the real economy,” Jean-Claude Trichet, the ECB’s president, said. He added: “Global and euro-area demand are likely to be dampened for a protracted period of time.”
Sweden’s Riksbank went even further, stunning the markets with a cut of 175 basis points to 2pc. The Swedish authorities are deeply alarmed by the collapse of vehicle sales at Volvo, as well as the large exposure of Swedish banks to the property crash in Eastern Europe
“We’re moving towards a world of zero rates in Europe and the G10 countries, perhaps as soon as the second half of next year,” said Michael Klawitter, a strategist at Dresdner Kleinwort.
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Mr Trichet said the eurozone is likely to contract by 0.5pc next year amid a “hardening” of the credit markets. This is a dramatic reversal from the ECB’s forecast of an economic rebound published in September. The bank has undoubtedly been startled by the latest PMI confidence data, which has a good record as a leading indicator and is now pointing to a brutal contraction of 2.7pc year-on-year in early 2009.
In France, President Nicolas Sarkozy unveiled a €26bn (£22bn) stimulus package of tax cuts and state spending to fight unemployment. It includes €1bn in loans for the French car industry, which is shutting a string of plants for up a month to clear an unprecedented glut of unsold vehicles. The state will build 100,000 new homes to keep construction alive.
This article was posted: Friday, December 5, 2008 at 5:15 am