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Bank of England cuts interest rates to 5.5%

ECB keeps rates unchanged, lowers next year’s forecast from 2.3% to 2%

(LONDON) The Bank of England cut interest rates yesterday as a global credit crunch threatened wider economic damage.

But the European Central Bank (ECB) left interest rates unchanged. While it has raised its eurozone growth forecast for 2007 to 2.6 per cent from 2.5 per cent previously, it lowered its forecast for next year to 2 per cent from an initial estimate of 2.3 per cent.

Growth in 2009 was expected to edge up to 2.1 per cent, ECB president Jean-Claude Trichet said.

The ECB kept the benchmark refinancing rate at 4 per cent yesterday, as predicted by economists.

Britain’s central bank cut interest rates for the first time in more than two years, by a quarter point to 5.5 per cent.

‘Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation,’ the Bank of England said in a statement.

Economists expected the ECB to raise its 2008 inflation forecast yesterday and cut its prediction for growth, illustrating the difficulty policy makers face in deciding what to do with interest rates.

‘The ECB is trapped in a policy void right now,’ said David Brown, chief European economist at Bear Stearns International here.

‘It is hemmed in by rising inflation risks in the short term and mounting downside risks to growth in the longer term.’

The ECB shelved a planned rate increase in September and has since kept rates on hold after the US housing recession made banks reluctant to lend, driving up the cost of credit.

While the ECB has offered banks extra cash to encourage lending, the cost of borrowing in euros for three months jumped to a seven-year high this week.

The US Federal Reserve on Oct 31 cut its benchmark rate by a quarter point to 4.5 per cent, the second reduction in as many months, to shore up growth in the world’s largest economy.

The Bank of England loaned £10 billion (S$29.3 billion) for five weeks as it provided commercial banks with extra cash to help fund them until January.

The UK central bank allocated 16.1 per cent of the total £62.2 billion in bids that it received, it said in a statement here yesterday.

The loans are at the benchmark interest rate.

Money-market rates rose to a two-month high on Wednesday as banks became reluctant to lend to each other on concern about US sub-prime losses and year-end funding.

‘The credit squeeze has intensified,’ said Philip Shaw, an economist at Investec Securities here.

‘It’s going to take longer for the money markets to return to normal than people thought a month ago,’ Mr Shaw said.

Top banks including Citigroup, Merrill Lynch and UBS have announced hefty losses and writedowns in recent weeks on assets tied to the crippled US sub-prime housing market.

 

Source: Reuters, Bloomberg, AFP (Business Times 7 Dec 07)

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