ECB May Have Embarked on Fastest-Ever Round of Rate Reductions

By Gabi Thesing

Oct. 31 (Bloomberg) -- The European Central Bank has embarked on the fastest round of interest-rate cuts in its history as the financial crisis threatens to cripple the economy, a survey of economists shows.

The Frankfurt-based ECB will slash its benchmark rate to 2.5 percent by April, according to the median of 28 forecasts in the Bloomberg News survey. That would see the rate drop 1.75 percentage points from its 4.25 percent peak in six months, outpacing the ECB's last easing cycle between May 2001 and June 2003. The bank has already lowered the rate by half a point 3.75 percent as part of a globally coordinated move on Oct. 8.

``Desperate times call for desperate measures,'' said Julian Callow, chief European Economist at Barclays Capital in London. ``The economy is fast sinking into recession and as a number of Governing Council members were directly involved in bank rescues it has really brought the crisis home for them.''

Central banks around the world are cutting borrowing costs aggressively as the financial crisis that started with the U.S. housing slump threatens to tip the global economy into recession. The economy of the 15 nations sharing the euro shrank in the second quarter and executive and consumer confidence in the outlook fell the most on record this month to a 15-year low.

ECB President Jean-Claude Trichet said this week a rate reduction at the Nov. 6 policy meeting is likely as inflation pressures ease. The ECB will cut its key rate by another half- point to 3.25 percent next week, a survey of economists shows. Quarter-point cuts will follow in December, February and April, according to the survey.

`Down Rapidly'

Deutsche Bank economists predict the ECB will cut the rate to a record low of 1.5 percent by the middle of next year.

``If the economy cools, then rates have to come down rapidly so one doesn't risk falling behind the curve,'' ECB council member Axel Weber said last night. Fellow council member Nout Wellink told the Dutch parliament yesterday that economic growth in Europe ``is more likely to be closer to 0 percent than 1 percent next year.''

Inflation is slowing as the economy stumbles and oil prices slump. The euro-area inflation rate dropped to 3.2 percent in October from 3.6 percent in September, the European Union statistics office in Luxembourg said today. ECB policy makers including France's Christian Noyer expect the rate to fall below the bank's 2 percent limit by the middle of next year.

``Inflation is easing and we are acting in a progressive way,'' ECB Executive Board member Lorenzo Bini Smaghi told Italian broadcaster RAI. Still, he also said in Rome today that central banks must not repeat mistakes of the past by cutting rates too much.

``The present crisis is partially due to interest rates that remained at low levels for too long,'' Bini Smaghi said. ``At that time, rates were lowered too much in order to stimulate growth. We need to avoid repeating the same mistakes.''

The U.S. Federal Reserve this week reduced its rate to 1 percent from 1.5 percent and the Bank of Japan also lowered borrowing costs. The Bank of England is poised to cut its benchmark rate by half a point to 4 percent on Nov. 6, another survey shows.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net