The European Central Bank has cut interest rates for the euro zone by 0.5 percent to a record low of 1.5 percent.
The ECB has also slashed its economic forecasts, predicting the region’s economy will shrink by between 2.2 percent and 3.2 percent this year but should start to pick up in 2010. In view of the falling GDP forecast, the ECB signalled further interest reductions were possible. ECB President Jean-Claude Trichet said: “Further decisions will depend on facts, figures, judgements on the basis of Governing Council discussions.” On inflation Trichet said: “Overall inflation rates have decreased significantly and are now expected to remain well below two percent over 2009 and 2010. This outlook for inflation is due to falling commodity prices and diminishing domestic price and cost pressure reflecting the severe downturn in economic activity.” The ECB has not yet decided if it will increasing the money supply to boost the region’s struggling economy. That is what the Bank of England has done as it also cut interest rates to a record low of 0.5 percent in the UK. The British central bank is running out of room to reduce the cost of borrowing and so with the economy shrinking and house prices falling it will expand the money supply by initially buying 84 billion euros worth of assets from commercial banks starting with UK government bonds due to mature in the medium and long term. On the foreign currency exchanges, both the euro and the pound fell lost value after the decisions were announced.