Europe Again Slashes Interest Rates

By Michael Bowman

Washington
15 January 2009

Another major interest rate cut in Europe has failed to rally world markets. The latest U.S. jobless indicator sent Wall Street's Dow Jones Industrial Average lower in afternoon trading. But, U.S. stock market indexes rallied to finish higher at the close of trading Thursday, on hopes that the government will extend more help to struggling banks.

Hoping to stem the effects of a deepening recession, the European Central Bank cut its main interest rate by half a point to two percent. Central Bank President Jean-Claude Trichet said the decision was approved unanimously by the institution's governing council.

"Why [the rate cut]? We were taking into account significant further alleviation of inflationary risks, due in particular but not exclusively to the slowing down of the global and European economy," he said.

The banks' action is the latest in a series of rate cuts undertaken by central banks around the world. Last month, the central bank slashed interest rates by an even larger amount - three-quarters of a percent. Trichet said he believes economic conditions will remain difficult for 2009, but predicted a recovery in 2010.

The global slowdown began in the United States after a home mortgage crisis that in turn prompted a sharp worldwide decline in the ability of banks to loan money. The United States is believed to have been in a recession for just over a year, during which time unemployment has risen by more than two percentage points and now stands at 7.2 percent.

Thursday, the U.S. Labor Department reported that new claims for unemployment benefits rose unexpectedly last week to 524,000 job-seekers, up more than 50,000 from the previous week. David Weiss is chief economist at Standard and Poor's.

"Any way you look at it, the labor market is weak and getting worse," he said. "We are in a recession. I am not sure whether it is the worst recession since 1982, or the worst recession since the 1930s. but it is going to get worse before it gets better, and do not expect any turnaround until at least mid-year."

Hong Kong's stock market finished the day down more than three percent, while Tokyo saw shares plunge nearly five percent. Major European markets also closed lower.