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Thursday, 8 November, 2001, 14:41 GMT
ECB takes bold action
One hundred euro note
Rates are now at their lowest level since February 2000
The European Central Bank (ECB) has slashed its key interest rate by half a percentage point to 3.25%.

It is the fourth cut to European rates this year and follows a similar reduction by the Bank of England on Thursday.

For many economists, the European cut was bigger than they had dared to hope.

"It's a good decision," said Klaus Wiener of AM Generali Finanz in Koln.

Financial markets had been optimistic the ECB would cut interest rates to shore up the eurozone's flagging economy.

'Weak' growth forecast

ECB president Wim Duisenberg said eurozone growth would be "weak" during the second half of this year but added that the risk of inflation had been contained.

The terrorist attacks on the United States have contributed to the likelihood of "delays in investment activity" and slipping consumer confidence, he said.

He predicted recovery will take place in the second half of next year.

'Long overdue'

The ECB has been criticised for failing to match the aggressive action of the US Federal Reserve, which has cut rates 10 times this year to stimulate growth.

Mr Wiener of AM Generali Finanz said the latest reduction was "long overdue" as "they should have done it weeks ago".

"The politicians and the ECB have so far tried to play it cool... the 50 basis points from the ECB is a clear sign they know now that that they have to do something to stabilise sentiment," Deutsche Bank's Ulrich Beckmann told the BBC's World Business Report.

However, discussion remains as to whether politicians - particularly in Germany - need to do more to reform the economy.

Thorsten Wack, co-owner of advertising agency SSW, argues that while German tax reform is good for big companies to set free hidden assets, taxes still remain high for smaller companies.

Time for action

The case for rate cut action has been mounting fast following the 11 September terrorist attacks and the subsequent string of gloomy economic data.

"It has become quite clear that central banks are becoming increasingly concerned about the pace of deterioration in the global economy," HSBC's global economist Janet Henry told WBR.

Germany, the eurozone's biggest economy, released data on Thursday that showed that industrial output continues to fall.

It dropped more sharply than expected, down by a seasonally adjusted 2% in September after a rise of 2.2% in August, government figures showed.

Pressure

The ECB has criticised the continual pressure it faces to cut rates from politicians and financial markets.

Mr Duisenberg revealed the bank will now consider interest rates once a month, instead of fortnightly as before.

"It is a very wise decision... it will lower speculation in the market and reduce volatility," said Volker Nitsch of Bankgesellschaft Berlin.

Mr Duisenberg also seemed to suggest that further reductions are unlikely, saying the new level of interest rates "is appropriate to maintain price stability over the medium term" and support economic growth.

Inflation eases

"Inflation is not around the corner, but we will be safely under the 2% limit we have set for price stability," he added.

The bank has stressed that above-target inflation was an obstacle to further rate cuts.

Eurozone inflation fell to 2.4% in October from 2.5% in September, continuing a steady decline since May, when it peaked at 3.4%,

 WATCH/LISTEN
 ON THIS STORY
IIB Bank's Austin Hughes
"The right move at the right time"
Ray Attrell, 4-cast
"It is very clear that the eurozone economy has been decelerating very sharply"
HSBC's Janet Henry
"Interest rates do take some time to feed through into the economy"
See also:

08 Nov 01 | Business
Sharp cut in UK interest rates
05 Nov 01 | Business
Eurozone inflation edges lower
25 Oct 01 | Business
ECB leaves rates on hold
24 Oct 01 | Business
Fed sees US economy struggling
23 Oct 01 | Business
Germany 'on the brink of recession'
23 Oct 01 | Business
French shoppers resilient
19 Oct 01 | Business
Euro drops as confidence collapses
19 Oct 01 | Business
Rate cut row mars summit
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