Alarmed by the rapid economic downturn, the European Central Bank on Thursday lowered its benchmark interest rate by a half point to 2 percent, and hinted that the rate would fall further from what is already the lowest level ever, HeraldTribune reported.
The bank has now more than halved its main borrowing rate in the past three months, as the outlook for Europe - and the global market for its exports - continues to darken.
Jean-Claude Trichet, the ECB president, said the latest cut was intended to try to head off what the bank expects to be further bad news in the coming months. Such a forward-leaning approach has up to now been more closely associated with the U.S. Federal Reserve's aggressively loose monetary policy.
"The data surprised everybody about how negative it turned out, so the ECB deserves credit for recognizing that," said Julian Callow, chief Europe economist at Barclays Capital. "They are now focused on being much more pre-emptive, and that puts them more into the camp of the Fed."
It also marked a sharp pivot from just a month ago, when the ECB projected that the economy of the 16 countries that use the euro would grow by up to 1 percent in 2009, despite the devastating impact of the financial crisis. Now, the bank said, even that forecast looks optimistic.
"Economic activity throughout the world, including the euro area, has weakened further," Trichet said. "In particular, foreign demand for euro area exports has declined, and euro area domestic activity has contracted in the face of weaker demand prospects and tighter financing conditions."
Most economists now expect the euro-zone economy to contract by 1.5 percent to 2 percent in 2009. "I see 2010 as the year of the recovery and the pickup," Trichet said.
The reduction brings the ECB back to where it was in December 2005, when it began raising its key rate despite hollers from some political figures and many economists about choking early stirrings of a recovery in growth. The bank had held the rate at 2 percent for over two years, beginning in June 2003.
That level was a historic low for all of the central banks that came together to create the ECB just over a decade ago, Trichet noted.
The bank has so far brushed off suggestions that it buy new kinds of financial assets to force down interest rates at longer maturities.
Trichet highlighted how rates like the 3-month Euribor, a benchmark for lending among banks, have eased somewhat in recent weeks, though they are still stubbornly elevated as banks avoid the lending among themselves that was normal before the financial crisis began.
Trichet refused to rule out additional rate reductions, even as he hinted that the ECB would put off further moves until its March meeting, when it will publish new staff projections for euro-zone growth.
"We did not say that this is the limit, and we will not move anymore," Trichet said.
The ECB's grim assessment of the economy is a nod to a flood of data over the past month that has shown across-the-board weakness in Europe as the euro, which was created on Jan. 1, 1999, enters its 11th year.
German exports, once a mainstay of the euro area, tumbled 10.6 percent in November, implying that the largest economy in the region contracted by up to 2 percent in 2008.
France also saw production decline sharply as manufacturing, still a mainstay of the European economy, showed weakness from one end of the Continent to the other.
Already low business confidence ebbed further throughout Europe, surveys showed.
The ECB's move came as one of the major ratings agencies highlighted the increasingly divergent performances of the euro area's economies.
Standard & Poor's this week cut Greece's credit rating as worries about its ability to control public finances mounted. It also warned that three other countries - Ireland, Spain and Portugal - face a similar fate as they grapple with the cascading financial crisis and ballooning budget deficits.
All four countries have "lost competitiveness relative to their European peers," Standard & Poor's said in a statement Thursday.
Other countries with similar economic woes like Britain, Germany and France continue to enjoy top ratings.
But Trichet applied a bit of pressure on them as well, insisting that all countries should be careful not to overstretch budgets as they look for ways to stimulate their economies.
"The current economic situation calls for particular prudence with regard to the adoption of extensive fiscal stimulus measures taking into account the particular fiscal situation in each country," Trichet said.
