December 4, 2008 / 12:13 AM / 10 years ago

Europeans cut interest rates sharply to fight crisis

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.

European Central Bank (ECB) President Jean-Claude Trichet (L) and Belgium's National Bank Governor Guy Quaden arrive for a news conference at the end of an ECB Governors Council meeting in Brussels, December 4, 2008. REUTERS/Eric Vidal

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.

FORECLOSING AND RETAILING

In other measures to deal with the economic crisis, U.S. Federal Reserve Chairman Ben Bernanke urged more aggressive action to halt home foreclosures. Many economists believe the U.S. economy cannot recover until the free-falling housing market stabilizes.

The International Monetary Fund’s chief economist said the global economy has stepped back from the brink of financial catastrophe, but it is not entirely out of danger.

“The message from the financial markets at this point is that progress has been made, but it is much too early to declare victory,” Olivier Blanchard wrote in the December issue of the magazine Finance & Development.

The chief executives of the major U.S. auto companies went cap in hand to Washington to plead for $34 billion in aid from Congress so they can stay in business. It was their second appearance there in as many weeks.

The president of the United Auto Workers warned a Senate panel that General Motors and Chrysler were on the brink of failure. “We could lose General Motors by the end of this month,” Ron Gettelfinger said.

U.S. retailers posted sharply lower November sales.

Discounter Wal-Mart Stores Inc bucked the trend with a bigger-than-expected rise, but excluding its results, same-store sales fell 7.8 percent, worse than the 6.9 percent decline forecast by analysts, according to Thomson Reuters.

That was the worst monthly performance since it began tracking sales data in 2000. Still, in a sign for the better, nearly half of the 35 retailers reviewed by Thomson Reuters beat bleak sales estimates.

In a separate measure of the now struggling retail sector, the International Council of Shopping Centers said U.S. monthly chain same-store sales fell a record 2.7 percent year-on-year in November.

It forecast November-December holiday chain same-store sales would be flat to down 1.0 percent.

STIMULATING

France announced a 26-billion-euro ($32.9 billion) stimulus plan targeting infrastructure and investment projects for its faltering economy as data showed the unemployment rate rose in the third quarter to 7.7 percent.

With the United States, Europe and Japan now in recession, data showed a mounting pattern of job losses and corporate woes across the globe. U.S. factory orders fell a whopping 5.1 percent in October, much worse than expected.

The global interest-rate cuts are aimed at making credit cheaper and so boost spending, but banks will need to overcome their reluctance to lend for the measures to take hold.

Sweden’s central bank, the Riksbank, said it expected rates to remain at the new 2.0 percent level over the coming year. There was an “unexpectedly rapid and clear deterioration in economic activity since October,” it said.

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The Bank of England, also taking rates down to 2.0 percent, made clear the downturn had picked up pace and conditions in credit markets remained difficult.

Indonesia also made a surprise cut in its key interest rate, by 0.25 percentage point to 9.25 percent — the first since December 2007 as the government sought to protect the economy.

Additional reporting by Reuters bureaus worldwide; writing by Angus MacSwan and Burton Frierson; Editing by Jan Paschal

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