By Mike Caggeso
Associate Editor
Money Morning
The European Central Bank (ECB) and the Bank of England (BOE) today (Thursday) cut interest rates to all-time lows, as both economic bodies brace for continued pain from the worst recession since World War II.
Meeting in Frankfurt, the ECB governing council decided to reduce its benchmark lending rate 50 basis points to 1.5%, the lowest since the ECB took much of the continent's monetary policy under control.
ECB President Jean-Claude Trichet also slashed the bank's growth forecasts, predicting the economy will contract by about from 2.2% to 3.2% this year, down from the ECB initial estimate of a 0.5% contraction.
So far, the euro area's economy shrank 1.5% in the first quarter this year. And with unemployment edging closer to 10%, inflation trudging at 1.1% and manufacturing contracting at a record pace last month, the ECB is certainly correct to readjust its forecast.
"Our hands are not tied at all. We do whatever we judge appropriate to do, taking into account the situation, Trichet said at a news conference after the rate cut, Reuters reported. "We're not exactly, as everyone knows that, in the situation of the United States, or in the situation of the U.K., then we have to optimize what we do... I exclude nothing."
Edging Trichet's confidence was his vagueness of future measures other than more rate cuts.
"We are discussing and studying possible new non-standard measures," he sad. "I will not elaborate on that. We have absolutely no pre-commitment to any particular non-standard measure. I don't exclude anything and I will give you a rendezvous if and when we decide, then I will be very very happy to explain what we will have decided but we are studying possible additional non-standard measures."
Rate Cut, Asset Shopping for Bank of England
Meanwhile, the BOE lowered its benchmark lending rate 50 basis points to 0.5%, the lowest rate in the bank's 315-year history.
In its news release, the bank said it was prompted by the recession's falling sky - weakening world activity, U.K. manufacturing output sharply falling in the fourth quarter, lowered consumer spending, falling business investments, rising unemployment and harsh credit conditions facing businesses and households.
Additionally, inflation is slowing lower than its 2% target for the medium term, the BOE said.
The bank also announced it will buy as much as $211 billion (150 billion pounds) in government and corporate bonds, a policy known as quantitative easing, and a move that mirrors the United States Federal Reserve. The BOE said it could take up to three months to finish buying these assets.
Writing to Chancellor of the Exchequer Alistair Darling in February, BOE Governor Mervyn King outlined the benefits of the using the central bank money to buy healthy private-sector investments.
"In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels," King wrote in the letter, which was released to the public today. "Accordingly, it would be beneficial if the facility could also use central bank money to purchase high-quality private sector assets to improve liquidity in credit markets that are currently not functioning normally, building on the facility we have already put in place financed by the issuance of Treasury bills."
Speaking before U.S. Congress, U.K. Prime Minister Gordon Brown petitioned that the world follow the lead of the BOE and U.S. Federal Reserve.
"Let us work together for a worldwide reduction of interest rates and a scale of stimulus round the world equal to the depth of the recession and the dimensions of the recovery we must make," Brown said, Bloomberg reported.
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5 March 2009 - Monetary policy decisions