The European Central Bank (ECB) has cut interest rates for the fifth time in six months, lowering borrowing costs to an historic low and signaled further reductions were likely in the coming months amid a possible negative inflation rate. A 0.5 percent reduction brought the ECB’s benchmark refinancing rate down to 1.5 percent and followed an announcement in London that the Bank of England (BoE) meeting had also trimmed the cost of money the same amount.

Speaking at a press conference following a March 5 meeting of the ECB’s 22-member rate-setting council, bank chief Jean-Claude Trichet said: “We did not ex ante decide that this was the lowest we could attain.” With inflationary pressures diminishing and a severe economic downturn having set in, Trichet warned that inflation in the 16-member Eurozone could slip to “negative levels” in the coming months with the recession playing havoc with public finances across the currency bloc. But Trichet again stressed that the bank saw “a number of drawbacks” with a zero interest rate level and said the ECB was considering a series of “non-standard measures” to help monetary policy underpin growth. “We do not exclude anything,” said Trichet. At the same, he set out a new set of so-called ECB staff Projections, which underscored the deepening economic slump in the Eurozone with growth shrinking dramatically as inflationary pressures dwindle rapidly.

Many analysts believe that the ECB will lop another 0.5 percent points off rates in the 16- member Eurozone by the middle of the year, bringing the refinancing rate down to just one percent. This comes after the ECB took a breather in its rate-cutting cycle in February. “The ECB has returned from its reflection period with a strong signal of its determination to bring unfinished business to an end,” said ING economist Carsten Brzeski. The Eurozone economy is now likely to contract by 2.7 percent per cent this year and to stagnate next year but with growth gradually gaining ground as 2010 unfolds. Despite February’s unexpected tick up in the Eurozone’s annual inflation rate to 1.2 percent, consumer prices remain well below the ECB’s two percent inflation target this year and in 2010.

As a result, staff projections show annual Eurozone inflation falling to between one percent and 0.7 percent in 2009 before edging up to between 0.6 percent and 1.4 percent in 2010. Moreover, with the ECB having slashed rates by 2.25 percent points since October, 2008, the markets are also waiting for any hints from Trichet that the bank has softened its stance reverting to other noninterest rate instruments to help spur economic growth. Meanwhile, dwindling inflation and a steady stream of bleak economic news had helped to lay the foundations for the rate cut.

GRIM REAPINGS

At the same time, another round of bleak earning results from leading banks and financial houses sparked renewed concerns about the state of the global financial sector. The International Monetary Fund predicts Eurozone economic growth will slump by two percent in the wake of the global downturn, which was triggered by a crisis in the US banking business. Economic confidence in the Eurozone plunged to an historic low in February, according to the European Commission’s closely watched economic sentiment indicato, while unemployment climbed to a 28- month high of 8.2 percent in January. Meanwhile, The United States shed 651,000 jobs in February, the latest sign of a deepening recession and raising the unemployment rate to 8.1 percent, the US Labour Department said. The American unemployment rate now stands at its highest level since 1983 and 4.4 million people have lost their jobs since the US recession began in December 2007 - more than half in just the last four months. Job losses were “large and widespread” across nearly all sectors of the economy, led by manufacturing, construction and financial services, the department said. The only major exceptions were the health care industry and government.

NO EUROZONE CHANGES

Trichet also ruled out changes to the rules for joining the Eurozone amid calls to help shield troubled Central and Eastern European economies from the global financial crisis. “I would say that at this stage our position would be that it is extremely important that we do not change any framework,” Trichet said following a meeting of the ECB’s rate-setting council. His comments follow signs of growing economic pressures in parts of Central and Eastern Europe, which at one point triggered a major sell-off of currencies and shares across the region leading to concerns about western European banks’ exposure to the area. The 10-year-old Euro has been enjoying a newfound appeal as a result of the financial firestorm that has recently swept through world markets with the common currency suddenly seen as potential protection in a time of crisis.

But of the wave of Central and Eastern European states that have joined the EU in recent years, only Slovenia and Slovakia have been accepted as members of the Euro. “We have rules whether for belonging to the ERM2 (the first stage of Euro membership) or for the Euro, I would say that sticking to the rules as they are is very important for the stability of, I would say, the European Union as a whole,” said Trichet. “I would say it’s not good to suggest that some are in such a weak situation that you would transform the rule for the sake of that situation. I trust really that it is important to stick to the present framework as it is,” he said. The ECB chief said there were no calls within the European Union (EU) for moves to consider loosening the criteria for joining the 16-member Eurozone.

IMF WANTS MORE STIMULI

The world should adopt economic stimulus plans that carry well into 2010, and possibly 2011, to ease a global recession and must expand financial regulation across all sectors to prevent a similar crisis in future, the IMF said in a series of reports. It warned that the world economic crisis was showing no signs of letting up, and urged greater international coordination ahead of a G20 summit next month in London of the world’s leading economies. While many governments have stimulus packages in place for 2009, most “don’t have much in the works” beyond this year, IMF chief economist Olivier Blanchard told reporters in Washington. “What is clear now ... it’s going to take a long time before output goes back to normal,” Blanchard said. “It seems to us that at this stage that governments should be thinking about doing more in 2010, maybe in 2011.” The IMF has forecast world growth of only 0.5 percent in 2009 - which is rated as a global recession - and could lower that prediction even further in the coming months as trade and consumer demand have come crashing to a halt around the world. The call for more stimulus comes despite many governments already facing massive budget holes.

Advanced economies are running fiscal deficits of eight percent of gross domestic product on average, up from just two percent of GDP in 2007, the global financial watchdog said. Ahead of the G20 meeting, the IMF released a series of papers drawing some lessons from the financial crisis, which largely originated in the United States but has sent most of the world’s economies and stock markets into a tailspin. The IMF said financial institutions had been subject to “fragmented” regulations that allowed many complex areas such as hedge funds to fall through the cracks. In addition, many Western governments had in place tax incentives that encouraged a culture of debt that is largely faulted for the collapse. Financial firms took unnecessary risks, especially in the US mortgage market, which left them without enough cash on hand to survive a US housing crash that exposed them to hundreds of billions of dollars in losses. World leaders at the April G20 meeting will debate how to harmonise regulations across countries, as well as what immediate steps to take to revive global demand. The first leaders’ summit of the G20 in November set out the broad strokes of a financial overhaul, including the creation of a global “college of supervisors” that could watch over the world’s largest financial institutions.

SPAIN’S JOBLESS GROW

There was more bad news across the European Union, as businesses were staggered and governments tried to prop up companies and stave off growing lines of the jobless. The Spanish government approved a package of urgent measures to maintain employment and to protect the jobless after unemployment reached the record level of nearly 3.5 million people. The measures included financial benefits for companies employing jobless people, and allowing those entitled to unemployment benefits to touch them faster. Trade unions and employers’ organizations criticised the measures as insufficient. Prime Minister Jose Luis Zapatero’s socialist government has approved several stimulus packages to shore up the economy, which went into a recession this year. The latest Spanish official statistics put the unemployment percentage at 13.9 per cent in December, the highest in the European Union.

FORINT UNDER FIRE

The Hungarian forint continued its downward spiral, hitting a new record low of 317.45 against the Euro last week. Although the currency later firmed to around 313 against the Euro, this latest dip is worrying news for one of the EU’s most fragile economies. The weakening forint is bad news for ordinary Hungarians, who face increasing monthly repayments on foreign currency mortgages and loans. The forint was trading at around 250 to the Euro last summer, before Hungary was hit hard by the global financial crisis. The head of Hungary’s central bank, Andras Simor, warned that the instability of the forint is a major obstacle to the country’s hopes of joining the Eurozone as quickly as possible.

ESTONIA EYES THE EUROZONE

The previously overheated economy of Estonia showed fresh evidence that it was rapidly cooling off with the release of official statistics showing inflation dipped by 0.3 percent in February compared to January. Figures from Statistics Estonia confirmed that the consumer price index stood at 3.4 per centcompared to February 2008, the lowest figure since June 2005. As recently as June 2008, Estonian inflation stood at 11.4 percent. Reductions in fuel and housing costs had a large effect on the index, Statistics Estonia said. The news will be welcomed by Prime Minister Andrus Ansip, who has identified entry to the Eurozone as the nation’s number one priority.

NO WORK FOR FRANCE’S YOUNG

The unemployment rate in France, particularly among young people, rose dramatically amid the slump of 1.2 percent in economic output in France in the fourth quarter of 2008, official figures showed. One in five people under the age of 25 was without work, with the unemployment rate in this age group having risen by 2.1 to 20.4 per cent, the national statistics body INSEE has said. For the total workforce, unemployment rose by 0.6 percent to 7.8 percent. Seasonally adjusted overall figures - using International Labour Organization standards - showed 2.2 million unemployed French people.