Interest rates down in the eurozone and the UK

The European Central Bank today lowered its eurozone interest rates by 0.50% to 3.25%. It is the second reduction in less than a month. It is widely expected that the ECB will continue the reductions over coming months in order to bolster weakening economies throughout the eurozone. The rate is expected to be as low as 2% by next spring. Until last month ECB policymakers were reluctant to cut rates due to the effect it might have in raising the rate of inflation as people will have more money which should stimulate demand and increase prices. However, ECB President, Jean-Claude Trichet, said today this was no longer seen as a problem. This is because the rates of inflation throughout Europe are expected to plummet in coming months as our recession takes hold on lowering prices.

Earlier, the Bank of England was much more aggressive in cutting its rate by a whopping 1.5% to 3.0%. The large rate reduction seemed to scare the FTSE as it closed down 5.7%. The reason? The large cut made it clear the Bank of England now thinks the UK is heading for a long recession.