ECB cuts rate to half-century low

The European Central Bank (ECB) cut interest rates to the lowest since at least 1948 in any of the dozen nations using the euro as the currency's appreciation saps economic growth.

The ECB lowered the benchmark refinancing rate by half a point to 2 percent, the third reduction since December, following a meeting of its 18 council members in Frankfurt. The Bank of England today kept rates unchanged at a 48-year low and Sweden's central bank cut borrowing costs to the lowest since 1999.

The region's US$8 trillion economy is stagnating as the euro's 24 percent gain against the US dollar in the past year hurts profitability at companies such as Volkswagen AG and Alcatel SA.

Politicians including Italian Prime Minister Silvio Berlusconi have urged the ECB to cut rates as the euro's appreciation helps push inflation below the bank's 2 percent ceiling.

"This helps the economy but the signs of a recovery aren't strong," said Karsten Junius, an economist at Dekabank in Frankfurt and the co-author of a guide to how the ECB works. "We could see another cut in the second half."

ECB President Wim Duisenberg on Tuesday said that there are still "downside risks" to economic growth this year. The European Commission today said the euro economy may continue stagnating in the second and third quarters, after stalling in the first three months. European services busi-nesses, the biggest part of the region's economy, shrank for a fourth month in May.

The yield on the three-month Euribor contract maturing in September fell 3 basis points to 1.99 percent at 1:48 p.m. in Frankfurt. The three-month money market rate was at 2.17 percent.

"If we see a recovery, it won't be until the end of the year or the start of next," said Wolfgang Leese, CEO of Salzgitter AG, Germany's second-largest steelmaker.

Lower rates are needed "so that people can start investing again." The ECB has now pared interest rates seven times since the start of 2001, compared with 12 reductions by the US Federal Reserve in the same period. The Fed's benchmark interest rate currency stands at 1.25 percent, a 41-year low.

Today's cut takes the ECB's benchmark rate to the lowest for any country in the euro region since at least 1948, the year the deutsche mark was introduced and Europe first received money from the Marshall Plan.

The ECB took charge of monetary policy in 1999, when the euro replaced the mark and other European currencies.

The IMF this week said it expects the euro region's inflation rate to fall under 1.5 percent next year.

The ECB still sees the economy picking up in coming months.

The Bank of England today left its lending rate at 3.75 percent amid signs consumer spending may support Europe's second-largest economy, which grew at its slowest pace in a year in the first quarter.