BoE and ECB cut interest rates

Britain slashed borrowing costs by a surprising 1.5 percentage points yesterday and the European Central Bank (ECB) also cut rates as part of concerted efforts to revive world commerce and ward off deep recession.

The ECB met market expectations by reducing its interest rate by 0.5 percentage point, a move political leaders hope will limit any move into recession and curb job losses.

The Bank of England, faced with a slumping housing market, a decline in manufacturing and increased unemployment, astonished analysts by announcing a hefty 1.5 percentage point cut, the biggest since the Bank gained independence to set rates 11 years ago and a mark of the gravity of concern over the economy.

Heavy US 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 British cut "astonishing". Jonathan Loynes of Capital Economics called it "spectacular".

"There is still more to do," Mr Loynes said. "At three per cent, UK interest rates are still well above US ones when economic conditions suggest they should be as low if not lower ... Our view remains that UK rates will fall to one per cent or below."

Last month, the Bank of England joined forces with the US Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates.

Politicians in the 15-country eurozone hope a rate cut from the ECB, possibly half a point, will help stave off recession and limit unemployment.

The ECB move took its benchmark rate to 3.25 per cent.

The 15-nation eurozone's economy, which had grown steadily since the bloc's creation in 1999, contracted by 0.2 per cent in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures on November 14.

Rate cuts 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 yesterday's cut will put pressure on British banks to conform and back smaller businesses, some facing bankruptcy. The Swiss national bank cut its rates by 50 basis points.

Markets looked to US President-elect Barack Obama to name key members of an economic team that must tackle a crisis that originated in the US housing market 15 months ago before enveloping the banking system and threatening the very foundations of the global market economy.

"After the world rally on the day of the Presidential election, investors have now shifted their focus to how fast, and how well the new administration will address the current economic issues," said Yoo Soo-min, analyst at Hyundai Securities. Toyota Motor Corp., the world's biggest automaker, slashed its annual operating profit forecast by more than half and its shares tumbled over 10 per cent, making it the latest casualty in an industry hit hard by the slump. Goldman Sachs Group Inc. was laying off 3,200 employees this week, according to sources familiar with the situation. European stocks and Britain's FTSE 100 index briefly pared losses after the British move before falling back again to trade around three percent down.

US crude oil lost two per cent 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.

Falling world oil prices and ebbing economic activity have effectively banished fears of inflation that dominated policy thinking only a year ago.