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Bank of England Lowers Key Rate

February 07, 2003|From Bloomberg News and Reuters

LONDON — The Bank of England on Thursday unexpectedly cut its benchmark short-term interest rate to the lowest in almost half a century as growth in Europe's second-largest economy falters.

The central bank reduced its key rate to 3.75% from 4%, in the first reduction since November 2001. The rate now is the lowest since at least 1955.

The European Central Bank, also meeting Thursday, decided to leave its key rate at 2.75% but signaled it's ready to ease credit further in coming months.

Risks to growth "have been exacerbated" since the European bank's half-point reduction Dec. 5, ECB President Wim Duisenberg said. The bank didn't pare rates Thursday because a "cut at this moment would drown in the sea of uncertainties" surrounding a possible war with Iraq, he said.

European short-term interest rates remain well above those in the United States.

The U.S. Federal Reserve reduced its key rate to a 40-year low of 1.25% in November, from 1.75%, as it sought to ensure that the economy remains on a growth track.

The Bank of England's cut, and Duisenberg's hint that lower rates are coming on the Continent, failed to help slumping European stock markets. Britain's FTSE-100 index lost 2.2% to 3,597.00, though it remains above the seven-year low reached Jan. 28.

In Germany the DAX index dropped 2.8% and in France the CAC-40 index lost 1.7%.

A Bloomberg News index of 500 European blue-chip stocks is down 7.3% year to date, compared with a 4.7% loss for the U.S. Standard & Poor's 500.

Britain's economy grew at the slowest pace in a decade last year. Services industries, the largest portion of gross domestic product, are slowing and manufacturing orders are shrinking.

"Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated," the Bank of England said in a statement.

The European Union said the economy of the 12 euro-zone nations may shrink this quarter after growing at the slowest pace in nine years in 2002. Consumer confidence fell to almost a six-year low in January. Germany said Thursday that factory orders in December fell the most in more than seven years.

"More disappointing growth news is in the pipeline," said Silvia Pepino, an economist at J.P. Morgan Chase & Co. in London.

The recent strength of the British pound and the euro against the dollar gives British and European central banks more leeway with rates: They can ease credit without risk of damaging their currencies, analysts said.

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