ECB shocked at downturn

The Bank of England's move yesterday to cut base rates by a larger than expected half a percentage point was swiftly followed by a similar decrease on the Continent, as the European Central Bank joined in global efforts to stave off recession.

Business leaders welcomed a round of rate cuts which the ECB's president, Wim Duisenberg, described as coincidence, not coordination. He gave warning that the economy of the 12-member eurozone could take longer to recover from its slowdown than previously believed.

The ECB justified its fourth cut in rates this year and the second since the terrorist attacks on the US on September 11 on the grounds of lower inflation, which is expected to fall back well below the ECB's 2% ceiling. Mr Duisenberg also acknowledged that the bank has been taken aback by the speed of the economic downturn in recent weeks.

"Confidence has been hit harder than we thought only a few weeks ago and it will take longer than we assessed earlier for the economy to recover," he said.

The International Monetary Fund this week forecast that Germany, the eurozone's biggest economy, would grow by only 0.7% this year and 1% next year.

The ECB president argued that it was unlikely that the eurozone would slip into recession but admitted that when growth did pick up next year "it will be slow, it will be moderate".

Central banks have been under increasing pressure to cut rates amid mounting job losses and falling business and consumer confidence. Lower borrowing costs on both sides of the channel were greeted with relief yesterday.

Stephen Radley, chief economist at the Engineering Employers' Federation praised the half-point cut, saying: "Industry will welcome this decision as a clear signal of intent that the bank will do everything in its power to limit the potential damage to the economy from the global downturn."

Analysts said the MPC's 7th rate cut this year should help to shore up consumer demand in the uncertain economic climate since September 11. "The consumer-side of the eco nomy appears to be bearing up well and there is no reason why confidence and activity should not bounce back," said Ian Fletcher, chief economist at the British Chambers of Commerce.

Holger Fahrinkrug, senior economist at UBS Warburg in Frankfurt, said that the ECB could have cut rates earlier, but "I would rather [see a cut] later than not at all." The ECB had acknowledged that its outlook only a matter of weeks ago "was probably too optimistic". The 50 basis point move from the ECB was larger than expected, but Kamal Sharma, currency strategist at Commerzbank, said that the euro would have run into selling pressure if the ECB had failed to match the scale of cuts by the US Federal Reserve and the Bank of England's monetary policy committee.

After this week's triple dose of half-point cuts from the big central banks, Mr Sharma cautioned against expecting similar sized rate cuts in the near future. "I think we have seen the end of 50 basis point moves and we are moving to a period of fine tuning," he said.

Mr Duisenberg announced that the ECB governing council will hold one rate setting meeting each month, rather than two. The aim was to reduce market volatility and increase debating time on other issues.