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ECB bows to rate pressure
FRANKFURT, Germany (CNN) -- After waiting more than a year, the European Central Bank finally moved on Thursday to shore up the region's flagging economy by cutting its key interest rate by half a percentage point. The ECB lowered its benchmark rate to 2.75 percent after holding it at 3.25 percent since November 2001. Its UK counterpart, the Bank of England, earlier on Thursday decided to leave rates unchanged, while the Swedish central bank cut its borrowing costs for second time in three weeks.
The ECB rate reduction, which had been widely anticipated, came after mounting pressure -- both inside and outside the central bank -- to ignore concerns over high inflation and focus instead on lower borrowing costs to encourage spending by business and consumers. "There is a multiplicity of reasons why the ECB has eased again and by so much," said investment bank Bear Stearns.
"Critically the euro zone fundamentals have been crying out for lower rates for quite some time, with growth momentum slowing... Germany close to a double dip recession and inflation set to slow dramatically next year." Speculation of a rate cut has been rampant after the ECB disappointed the markets last month by not following the lead of the U.S. Federal Reserve, which cut its key rate by half a percentage point. Even the head of the ECB signalled the need for a rate cut earlier this week, saying inflation -- a major concern among central bankers -- was showing signs of abating and could provide a window for lower borrowing costs. Wim Duisenberg said although inflation could still rise above the bank's target ceiling of 2 percent next year, weak growth and the threat of war against Iraq continue to cloud the economic outlook for the 12-nation euro zone. He reiterated those views on Thursday at a press conference following the rate cut announcement.
"Since our last meeting, the arguments in favour of a cut have strengthened." Duisenberg said. "The evidence that inflation pressures are easing owing in part to sluggish economic expansion has increased. Furthermore, downside risks to economic growth have not retrenched." Many business leaders believe governments also need to do more to stimulate economic recovery. Heinrich von Pierer, the Chief Executive of Siemens, told CNN that a half a percentage point cut was "of course a step forward... but what we need is structural reforms in Europe and Germany. This is more important than a cut in rates." Euro zone inflation eased slightly in November to an annual rate of 2.2 percent, down from 2.3 percent a month earlier. The ECB has said it still expects inflation to fall below 2 percent sometime in 2003 if oil prices and wage increases remain moderate. Meanwhile, the euro zone economy -- especially in Germany, the region's largest contributor -- continues to struggle to find direction. The economy expanded by just 0.3 percent in the third quarter of this year, and the European Commission said on Wednesday growth will likely be limited to 0.2 percent in the first quarter of 2003. Unemployment in the euro zone rose to 8.4 percent in October -- the latest monthly figure available -- from 8.3 percent in the previous month. The labour market is even weaker in Germany where the jobless rate increased to 10 percent in November from 9.9 percent in October.
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