European Central Bank cuts rates to 2 percent

/ Source: The Associated Press

The European Central Bank cut its interest rates by a half percentage point to 2 percent on Thursday, moving to protect the continent’s economy against a deep recession amid increasingly grim economic data.

The decision to cut the main refinancing rate from 2.5 percent was in line with market expectations and left the rate at its lowest level since December 2005. It followed a three-quarter point cut last month.

“Despite some apparent earlier reluctance to cut interest rates significantly in January after reducing them by 175 basis points over the previous three months, the ECB really had little option but to act again given the clear, widespread evidence that the euro zone recession is deepening,” IHS Global Insight economist Howard Archer said after Thursday’s decision.

With euro zone inflation heading lower, “the ECB had ample scope to cut interest rates further,” he argued.

The ECB has now reduced interest rates on four occasions since October from a high of 4.25 percent, though it has stopped short of the more aggressive cuts enacted by the U.S. Federal Reserve and the Bank of England.

In an unprecedented move last month, the Fed ratcheted down its rate to hover between zero and 0.25 percent. The Bank of England cut its rate last week by half a percentage point to 1.5 percent.

Business confidence surveys have pointed at a deeper than anticipated recession in the now 16-nation single currency zone — Slovakia joined at the start of the year. A survey last week from the European Commission revealed that overall economic confidence slid to a record low in December.

On Wednesday, Germany’s Federal Statistical Office offered a rough preliminary estimate that the country’s economy — Europe’s biggest — may have shrunk by as much as 2 percent in the fourth quarter. It said Germany’s annual growth last year was 1.3 percent, only about half the previous year’s level.

The euro zone economy was already officially in recession even before the worst of the financial crisis in October, having slumped 0.2 percent in both the second and third quarters of 2008. The accepted definition of a recession is two quarters of negative growth.

Germany and Italy both slipped into recession in the third quarter but France bucked the trend, posting a 0.1 percentage point quarterly increase in output during the period following a 0.3 percent drop in the second quarter.

Inflation has dropped to an annual rate of 1.6 percent amid sliding oil and commodity prices and below the ECB’s mandate to keep inflation “close to, but less than 2 percent” for the first time since August 2007.