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Europe poised to cut rates as global slump deepens

(Agencies)
Updated: 2008-12-04 16:37

TOKYO/ BEIJING -- Central banks in Europe are poised to slash interest rates on Thursday to try to contain a global economic slump that appears to be spreading faster than policy makers in the industrialised countries had anticipated.

A Euro symbol is seen in front of the European Central Bank (ECB) in Frankfurt. Central banks in Europe are poised to slash interest rates on Thursday. [Agencies]

Asia-Pacific nations kept up the flood of grim news after US data overnight showed private sector employers axing jobs at the fastest pace in seven years, and that the economy, in recession for a year, had deteriorated in the past few weeks.

Japanese companies slashed spending, pushing the economy even deeper into recession than the government had estimated. Australian vehicle sales plunged and the Reserve Bank of New Zealand said it probably would have to cut rates again after a record reduction of 150 basis points on Thursday.

"With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since World War Two appears to be on track," said JPMorgan economists in a research note.

China promised to support the push to stabilise financial markets, battered by bank failures in the United States and Europe, saying its pursuit of fast, stable growth would likely be its biggest contribution to the cause.

China cut interest rates last week to spur an economy now threatened by a crisis that began with US mortgage defaults last year. Australia and Thailand slashed rates this week to avoid recession and the European Central Bank, the Bank of England and the Swedish central bank are likely to follow.

The Floor

Analysts expect a 50 basis point reduction from the European Central Bank and twice as much from the Bank of England and Sweden's Riksbank. With the euro zone in recession and Britain heading there, a former BOE policymaker said an even larger cut could be justified.

"If zero is the floor, there is no reason not to go there immediately," Willem Buiter wrote in his Financial Times blog.

The cuts forecast by analysts in Reuters polls would take the euro zone's interest rates to 2.75 percent, Sweden's to 3.75 percent and Britain's to 2 percent. US interest rates will fall below 1 percent with the next cut expected this month.

As interest rates approach zero, central banks are considering other options to revive their economies and avoid the kind of deflationary spiral that gripped Japan in the 1990s.

A senior Federal Reserve official said on Wednesday purchases of government debt might be useful to tackle deflation, echoing remarks from Fed Chairman Ben Bernanke.

"You also do it to stimulate the economy when further reductions in interest rates are infeasible," Richmond Federal Reserve President Jeffrey Lacker told reporters.

Japan resorted to debt purchases to pump money into the economy as it grappled with the problem of falling prices and zero interest rates after an asset bubble collapsed in the 1990s. The world's second-largest economy may soon be facing the same dilemma.

Japanese officials are talking of the risk of deflation with the economy on course for its longest contraction on record.

The 0.1 percent contraction the government estimated for third-quarter GDP appeared optimistic after a Ministry of Finance survey showed companies cut capital spending by 13 percent.

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