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European Central Bank Cuts Rates to 2 Percent

The European Central Bank reduced a key interest rate by half a percentage point today, an aggressive step by an institution that has taken a more conservative approach to the current economic crisis than the Federal Reserve and other major central banks around the world.

The decision reflects the accumulation of evidence showing that the European economy has followed that of the United States into recession, with major economies such as Germany facing a steep drop in industrial production and trade.

Just last month, the bank made its deepest rate cut ever, and at the time ECB President Jean-Claude Trichet indicated that further cuts were unlikely until it was clear how that round would affect the economy -- and particularly the rate of inflation, which the ECB guards against even more closely than the Fed.

But with business conditions continuing the deteriorate and prices moderating, the bank decided to move, slashing its benchmark rate to 2 percent from 2.5 percent.

The issue of inflation worldwide has declined in importance. New U.S. data, for example, showed that prices paid by producers for goods and services fell 1.9 percent in December.

The ECB rate cut comes amid warnings of more trouble ahead. Along with mounting U.S. bank losses and deteriorating retail sales over the past year, the coming months may be even worse, Jamie Dimon, chief executive of J.P. Morgan Chase, said today as the company released its fourth-quarter earnings.

Morgan managed to post a fourth-quarter profit of $702 million, the company announced -- a 76 percent decline from the same period a year ago, but above the estimates of analysts who expected the company to barely break even.

Though Morgan's profit might stand out when Citigroup and other major banks report what could be large losses in coming days, Dimon in a news release still called the results "very disappointing" and said it was "a distinct possibility" that the economy will weaken further in 2009.

Morgan, for example, set aside an additional $4 billion to cover potential losses on loans. In an interview with the Financial Times, Dimon said he expected consumers to continue to struggle, and fall behind on credit card and other debt.

"The worst of the economic situation is not yet behind us," Dimon said.

One key concern: joblessness. Unemployment now stands at 7.2 percent, and with the economy contracting the figure might go higher in coming months, further stressing consumers and households. Data released this morning show that new claims for unemployment benefits jumped back above half a million for the week that ended Jan. 10 -- an elevated level. About 524,000 people filed new claims during the week. The number of new claims had dipped in prior weeks, but economists attributed that to partly to the holiday season, and assumed that some laid-off workers had postponed filing for benefits until after Christmas.

The number of continuing claims stood at 4.5 million, down slightly from the week before, but still nearly 2 million more than a year ago.

Source:  washingtonpost.com
Proposed by: Jules Temgo On 15/01/2009 - 23h37 Last update: 15/01/2009 - 23h40  Write a NEWS
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