Britain slashed borrowing costs by a surprising 1.5 percentage points Thursday and the European Central Bank (ECB) also cut rates, reflecting worldwide concern over the advance of global economic recession.
The ECB, covering 15 European nations, met market expectations by reducing its interest rate by 0.5 percentage points, a move national leaders hope will help stimulate economies and limit job losses.
"We face an extraordinary high degree of uncertainty," ECB President Jean-Claude Trichet told a news conference.
The Bank of England (BoE), facing a slumping housing market, a decline in manufacturing and increased unemployment, astonished many by cutting rates to 3 percent, the lowest level in more than half a century.
"There has been a very marked deterioration in the outlook for economic activity at home and abroad," a BoE statement said.
A global economic crisis beginning in the U.S. housing market has shattered many conventions, demolishing major world financial institutions and forcing the United States to mount a $700 billion operation to rescue its financial system.
Heavy U.S. job losses, a sharp decline in the world services sector and bleak company outlooks painted an increasingly dark picture this week.
Matthew Sharratt, UK economist at Bank of America, echoed widespread sentiment in calling the British cut "astonishing." Jonathan Loynes of Capital Economics called it "spectacular." Most analysts had expected a cut of 50 basis points.
"There is still more to do," Loynes said. "At 3 percent, UK interest rates are still well above U.S. ones when economic conditions suggest they should be as low if not lower …Our view remains that UK rates will fall to 1 percent or below."
Britain's economy shrank 0.5 percent in the third quarter and many experts do not expect a recovery until 2010.
The ECB move took its benchmark rate to 3.25 percent.
The 15-nation euro zone's economy, which had grown steadily since the bloc's creation in 1999, contracted by 0.2 percent in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures on November 14.
Rate cuts may be less effective than in the past.
Banks infected by a collapse of confidence within the financial system are still wary of extending loans and are reluctant to pass cuts on to borrowers.
But the sheer scale of Thursday's cut will put pressure on British banks to conform and back smaller businesses, some facing bankruptcy.
The Swiss national bank cut its rates by 50 basis points, citing a deteriorating global outlook.
Toyota Motor Corp, the world's biggest automaker, slashed its annual operating profit forecast by more than half and its shares tumbled over 10 percent, the latest casualty in an industry hit hard by the slump. Goldman Sachs Group Inc was laying off 3,200 employees this week, according to sources familiar with the situation.
European stocks and Britain's FTSE 100 index briefly pared losses after the British move before falling back again to trade over three percent down.
Falling world oil prices and ebbing economic activity have, for the moment, effectively banished fears of inflation that dominated policy thinking only a year ago.
SWIFT ACTION
Barack Obama's victory in Tuesday's U.S. presidential election along with the Democrats' tighter grip on Congress, raised hopes of a speedier injection of billions of dollars to shore up the struggling economy.
The first black U.S. president must wait until January 20 to move into the White House. In the meantime, though, he must decide on a successor for Treasury Secretary Henry Paulson, one of the architects of a $700 billion state rescue package inconceivable before the crisis broke.
Timothy Geithner, president of the Federal Reserve Bank of New York, former Treasury Secretary Lawrence Summers and former Fed Chairman Paul Volcker are among those mooted for the Treasury post. Obama may announce his pick on Thursday.
Signs grow that the slump is encroaching on Main Street. World number two sporting goods maker Adidas stood by its 2008 forecasts, but retracted targets for next year, declaring that conditions were too difficult to predict.
A Swedish central bank official said the shape of a Nordic aid package to crisis-hit Iceland had been decided. Norway said earlier this week it would provide Iceland with a 500 million euro ($643 million) loan to help the country rebuild an economy in tatters following the collapse of its biggest banks.
