Europeans cut interest rates sharply to fight crisis

By Burton Frierson and Angus MacSwan

NEW YORK/LONDON (Reuters) - Central banks in Europe slashed their benchmark interest rates by record amounts on Thursday to fight the global economic crisis, while U.S. automakers pleaded for a bailout to avoid collapse.

Many analysts applauded the large rate cuts but also indicated that even more sweeping moves may be needed to halt the worldwide economic slowdown resulting from the puncturing of the U.S. housing bubble.

Some of the world's most recognized companies announced thousands of further job cuts, while the European Central Bank dropped its benchmark rate by 0.75 percentage point to 2.50 percent, the euro zone's biggest cut ever.

Analysts said the inflation-averse ECB may now be in a race against time due to rising risks of a deflationary downward spiral of prices, wages and economic activity, which can be more difficult to fight than run-of-the-mill price growth.

"We're in danger of getting to a situation where inflation expectations turn deflationary, and monetary policy becomes less effective," said Sarah Hewin, senior economist at Standard Chartered Bank in London.

"As the economy slows, we see a more rapid adjustment of expectations toward deflation, which would require a swifter response of monetary policy."

Sweden lopped a record 1.75 percentage points off its policy rate to 2.0 percent, while the Bank of England chopped rates by 1.0 percentage point to 2.0 percent, the lowest level since 1951.

Weekly employment data from the United States showed the global reach of the problem all central banks are confronting.

The number of U.S. workers on jobless benefits rolls hit a 26-year high last month, supporting expectations that the Federal Reserve will cut its benchmark rate below 1.0 percent on December 16.

Adding to the gloom, top U.S. phone company AT&T Inc said it will eliminate 12,000 jobs, about 4 percent of its workforce, to cope with an economic downturn. Chemical maker DuPont Co said it would cut 2,500 to bring costs in line with deflating demand.

Among other large layoffs announced on Thursday, Swiss bank Credit Suisse said it was cutting another 5,300 jobs and Japanese bank Nomura cut 1,000 staff, bringing total financial industry cuts to more than 100,000 as banks cope with the worst crisis since The Great Depression.

On Friday, the U.S. government is expected to report another sharp fall in U.S. employment in the monthly payrolls data for November.

"Clearly we are expecting a very weak payroll report tomorrow," said Michelle Meyer, economist at Barclays Capital in New York, referring to the data.

U.S. stocks fell 3.0 percent, but were still above November's decade lows. European shares ended down, as did shares in Asia.

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