Bracing for recession, central banks cut rates

The Bank of England slashed its key interest rate by 1 1/2 percentage points Thursday to its lowest level in more than 50 years in a dramatic bid to cushion the coming recession, while the European Central Bank settled for a more conservative half-point trim.

The British central bank’s move to bring the base rate down to 3% -- the biggest single-day cut in 27 years -- caught markets by surprise, and economists were divided over whether it was a bold preemptive step or simply a sign that the bank had waited too long to address the crisis.

The last time Britain’s benchmark rate was at 3% was in 1955, when Winston Churchill was still prime minister.

European Central Bank President Jean-Claude Trichet said the central bank to the 15-country euro zone, where the economic downturn is not expected to be as deep and prolonged, discussed a three-quarter-point cut but decided for the smaller trim to 3.25%.

The moves in London and Frankfurt on Thursday were followed around Europe in a clear sign central banks are trying to batten down the hatches before the coming economic downturn.

Switzerland and Denmark lowered rates half a percentage point, to 2% and 5%, respectively, and the Czech Republic made a three-quarter-point cut to 2.75%.

The Bank of England and the European Central Bank, which followed the Fed and other banks in a coordinated cut Oct. 8, have been criticized in some quarters for being slow to respond to the sharp economic slowdown this year amid fears about inflation. Lower rates stimulate growth but can worsen inflation if done at the wrong time.

The Bank of England’s monetary policy committee said there “has been a very marked deterioration in the outlook for economic activity at home and abroad.”

It added that the threat of inflation, which had prevented it from making big cuts in recent months to spur the economy, had abated as lower retail energy and food prices appeared more likely in the coming months.

The European Commission forecast Monday that the economy in the 15 countries that use the euro would barely grow next year, expanding just 0.1%, with Germany, France and Italy stagnant. And it said Britain’s economy would slump 1% next year.