Europe gets record low rates, Britain gets cash

Eurozone and British interest rates hit record lows Thursday and the Bank of England unwrapped tens of billions of new pounds as central bankers tried to jolt their economies out of recession. The European Central Bank cut its main interest rate by a half point to 1.50 percent, and ECB chief Jean-Claude Trichet said it could well go even lower. In London, the Bank of England cut its main lending rate by half a point to 0.50 percent, an all-time low for the 315-year-old institution, and said it would create fresh funds to spur activity, a method known as quantitative easing. The BoE will pump out 75 billion pounds 106 billion dollars, 84 billion euros to buy government bonds over the next three months from commercial banks that are supposed to use the cash to extend credit to the wider economy. ECB policymakers declined to embark on the same path, with Trichet saying only: "We are discussing and studying possible new non-standard measures" to pull the 16-nation eurozone out of its first recession. The EU's Maastricht treaty prevents the ECB from directly purchasing government bonds, but it could buy so-called commercial paper, or debt issued by companies, a policy known as credit easing. The bank already lends unlimited amounts of funds to commercial banks at fixed rates, a point Trichet regularly highlights as a "non-standard measure." In the meantime, new ECB staff forecasts for eurozone growth and inflation were revised sharply lower from their previous estimates and caught many analysts by surprise. The forecasts now see the economy shrinking by about 2.7 percent this year, way below the previous estimate of a contraction of 0.5 percent. In 2010, zero growth was expected, down from a previous estimate of a 1.0 percent expansion. Inflation is tipped to average 0.4 percent this year, down from the December projection of 1.4 percent, while in 2010, prices were set to rise by around 1.0 percent, a downward revision from 1.8 percent. Despite pumping massive amounts of cash into the financial system, central banks have seen credit growth to companies and households falter, but Trichet noted some signs that lower interest rates were starting to be passed on by commercial banks. The ECB has cut its main rate six times from an early October level of 4.25 percent, but at 1.50 percent it is still well above that of other central banks. Trichet told media on Thursday: "We did not decide ex ante that we were at the lowest level," following the latest cut. The US Federal Reserve and Bank of Japan's main rates are essentially already at zero, and the Fed has begun to buy commercial paper directly from businesses in what chairman Ben Bernanke has described as credit easing. Quantitative easing on the other hand, which essentially amounts to running money printing presses overtime, has been touted by some economists as a possibly effective response to slumping business activity around the world. An ECB statement noted that because of "financial market turmoil, the world economy has weakened substantially in recent months." "A more aware and ready-to-act ECB is today's good news," he said.

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