The European Central Bank announced a three-quarters percentage point cut in its main policy interest rate – its largest ever – just hours after Sweden's central bank stunned markets by reducing the country's official borrowing costs by a record 175 basis points. The Bank of England slashed its rates by another 1 percentage point to 2 per cent, equal to the lowest rate since the Bank was founded in 1694.
Financial markets have already priced in further monetary policy easing in the months to come as economic data has continued to indicate a dire near-term outlook. Markets expect another 0.5 percentage point reduction in the eurozone by February and that UK rates will fall to 1 per cent in the near future.
Jean-Claude Trichet, ECB president, warned that “we see global economic weakness and very sluggish domestic demand persisting in the next few quarters”. The ECB forecast that the 15-country eurozone economy could contract by as much as 1 per cent next year, although it stopped short of talking of a bloc-wide recession. Risks to growth remained on the downside, Mr Trichet added.