7 Mar 2009

Europe interest rates cut to record low

9:58 am on 7 March 2009

The European Central Bank has cut interest rates to an all-time low and signalled further easing was possible as its staff forecast the euro zone economy could shrink by more than 3% this year.

The central bank cut rates on Thursday by half a percentage point to 1.5%, the lowest in its 10-year history.

Bank president Jean-Claude Trichet said he could not exclude further cuts, but refused to be pinned down on how soon the ECB could cut again, how low rates could go or if and when the bank would embark on the bond-buying operations used by other central banks to boost the economy.

His comments sent interest-rate sensitive two-year bond yields to a record low as markets bet on further cuts, while the euro extended losses against the US dollar, falling below $US1.25.

Mr Trichet said Thursday's rates decision was made by consensus, rather than unanimous - suggesting rate setters were spilt on how much to cut rates by.

Economists said the likelihood of the main refinancing rate hitting 1% by mid-year was increased by the ECB slashing in-house economic forecasts on both growth and inflation by a far larger margin than most had expected.