Britain slashes interest rates, ECB cuts its rate by 0.5%

Britain slashed borrowing costs by a record 1.5 percentage points today while the European Central Bank followed with a 0.5% cut.

The Bank of England, faced with a slumping housing market, steep decline in manufacturing and increased unemployment, cut its interest rate to three percent, citing a marked deterioration in the economic outlook.

The cut far exceeded general market expectations and underlined the gravity with which economic leaders view a crisis that began with a slump in the U.S housing market and has now enveloped the world economy. It was the biggest reduction since the Bank was given independence to set rates 11 years ago.

Heavy U.S. job losses, a sharp decline in the world services sector and bleak company outlooks painted an increasingly dark picture this week.

Matthew Sharratt, UK economist at Bank of America, echoed widespread sentiment in calling the cut 'astonishing'. Jonathan Loynes of Capital Economics called it a spectacular move.

Last month, the Bank of England joined forces with the U.S. Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates. Politicians in the 15-country euro zone hope a rate cut from the ECB, possibly half a point, will help stave off recession and limit unemployment.

Shortly after the Bank of England decision, the ECB said it was cutting its own rate by 0.5% to 3.25%.

Rate cuts, however, may be less effective than in the past. Banks infected by a collapse of confidence within the financial system are still wary of extending loans and are reluctant to pass cuts on to borrowers. But the sheer scale of today's cuts, especially in the UK, will put pressure on banks to conform and back smaller businesses, some facing bankruptcy.

The Swiss national bank cut its rates by 50 basis points. Markets looked to U.S. President-elect Barack Obama to name key members of an economic team that must tackle a crisis that originated in the U.S. housing market 15 months ago before enveloping the banking system and threatening the very foundations of the global market economy.

U.S. crude oil lost 2 percent to $63.96 a barrel, against a record high above $147 set in July. The fall, reflecting expectations a global recession, will reduce inflationary pressure on national economies and ease rate cuts.