February 5, 2009 / 4:43 PM / in 10 years

TOPWRAP 8-Recession pressures central banks, governments

* ECB holds rates at 2.0 pct, BOE cuts to 1.0 pct

* German orders plunge; U.S. jobless claims soar

* U.S. Senate nears vote on massive stimulus bill

* Dow Jones rises 1.3 pct on hopes for Obama bank plan (For more on the financial crisis, click on nCRISIS])

By Steven C. Johnson

NEW YORK, Feb 5 (Reuters) - Economic news was bleak on both sides of the Atlantic on Thursday as German manufacturing suffered its biggest decline since 1990 and applications for U.S. jobless benefits soared to a 26-year high.

The Bank of England cut its benchmark interest rate to a record low, but the European Central Bank left its borrowing rate steady while the U.S. Senate neared a vote on an economic stimulus plan.

“It’s pretty ugly,” Boris Schlossberg, director of currency research at GFT Forex in New York, said after the U.S. jobless figures were released, adding that it “goes to show that the economy is convulsing and contracting.”

Stocks in Japan and Europe fell but Wall Street rallied on hopes the Obama administration’s plans to shore up the financial system will stem bank losses and revive lending. U.S. Treasury Secretary Timothy Geithner will announce details of a plan on Monday, a Treasury official said.

The number of Americans filing for first-time unemployment benefits last week hit its highest level since late 1982, and the government’s payroll report, due on Friday, may show the economy shed as many as 525,000 jobs in January.

The deepening recession in economies across the globe forced Britain’s central bank to cut its benchmark interest rate half a percentage point to 1.0 percent, the lowest since the Bank of England was created in 1694.

“The global economy is in the throes of a severe and synchronized downturn,” the Bank of England said in a statement after delivering the latest in a series of aggressive rate cuts aimed at boosting the flagging British economy.

Central banks worldwide have cut interest rates sharply to stimulate demand after mass layoffs and factory closures, with the Federal Reserve and Bank of Japan pushing rates to near zero in recent months.

The ECB has also reduced rates over the past four months, though at a slower pace than its counterparts. While ECB President Jean-Claude Trichet indicated Thursday that the bank could still push rates below the current 2.0 percent, he said moving toward zero was not appropriate.

The ECB held its fire on Thursday despite data showing the fourth straight plunge in German factory orders in December.

In Spain, industrial output in December slid 19.6 percent year-on-year, its sharpest slowdown on record, and business lobbies blamed banks for the country’s severe recession and demanded state intervention if banks fail to boost lending.

The Bank of England, unlike the ECB, was expected to move toward zero interest rates, though economists were skeptical about whether that would be enough.

“Interest rate cuts are not the only tool to fix the recession,” said the British Retail Consortium’s Jane Milne. “The key issue now is not the cost of credit, but its availability.”

Atsushi Mizuno, who sits on the Bank of Japan’s policy board, said the world’s No. 2 economy was facing a hard landing and may have to adopt new policies.

“The Bank of Japan should be prepared to act promptly, including taking measures that could be considered unconventional in normal times,” he said.

CORPORATE WOES, STIMULUS IN FOCUS

Beyond interest rate policy, governments worldwide are scrambling for ways to beat the worst financial crisis since the 1930s and stem mounting job losses and social unrest.

U.S. senators neared a vote, which could come later on Thursday, on a massive economic stimulus package that they agreed should be around the $800 billion requested by President Barack Obama. [ID:nN05368276]

On Wednesday, lawmakers softened a “Buy American” clause in the stimulus plan that Obama said could spark a trade war, and the White House said Obama will hold his first news conference since taking office on Monday. [ID:nN05386452]

Meanwhile, glum figures from U.S. corporate stalwarts such as Kraft Foods, rising bad loans at Spain’s biggest bank, Santander, and a bleak outlook at Deutsche Bank kept markets on edge.

U.S. investor Warren Buffet invested 3 billion Swiss francs ($2.6 billion) into Swiss Re, though shares in the world No. 2 insurer fell 28 percent after it said it had written down twice that sum in toxic assets.

Deutsche Bank reported a net loss of almost 4 billion euros in full-year 2008, compared with a 6.5 billion euros profit a year earlier, on heavy write-downs and a slump in revenues from debt trading and other products.

“Looking forward, we see continuing very difficult conditions for the global economy,” said Josef Ackermann, Deutsche Bank’s chief executive.

Reporting by Reuters bureaus worldwide;

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