The European Central Bank extended its boldest-ever series of interest rate cuts by slashing official borrowing costs by another half percentage point on Thursday. But it made clear that private banks had to help boost confidence in the face of the sharp economic downturn.

Jean-Claude Trichet, ECB president, hinted strongly that interest rates could fall again in December after Thursday’s drop in its main policy rate to 3.25 per cent, the lowest since October 2006. Inflation could drop dramatically next year on the back of lower oil prices, with the economic slowdown further reducing price pressures, he said.

The latest move came less than a month after the co-ordinated cut in global interest rates on October 8, when the ECB cut eurozone borrowing costs from 4.25 per cent to 3.75 per cent. But the size of the latest reduction disappointed financial markets, especially after the Bank of England slashed its main policy rate by 150 basis points, a move that appeared to have taken the ECB by surprise.

The ECB’s caution relative to the Bank of England probably reflected the faster rate at which the UK was contracting, analysts said.

Prague springs surprise

The Czech central bank on Thursday unexpectedly slashed its headline interest rate by 75 basis points to 2.75 per cent and cut its forecast for growth next year from 3.6 per cent to 2.9 per cent, writes Jan Cienski in Warsaw.

The moves are a further sign that the global financial crisis is beginning to hit central Europe. “It was a surprise. Most analysts were expecting 25 basis points,” said Kamil Janacek, chief economist for Komercni Banka. “The basic aim of the Czech central bank was to be under the European Central Bank rate to avoid the inflow of speculative capital.”

While Poland did not join in the pan-European wave of rate cuts, retaining its rate of 6 per cent, Slawomir Skrzypek, the central bank governor, said the Czech decision made it more likely Warsaw would consider cutting rates as well.

Poland is expected to grow 5.5 per cent this year, but the finance ministry’s forecast of 4.8 per cent growth next year is looking increasingly unlikely, with many economists predicting growth of 3.5 per cent.

“They should be moving more aggressively to buy themselves insurance against the rapid pace of the downturn,” said Marco Annunziata at Unicredit. Holger Schmieding, at Bank of America, added that, “relative to the collapse in leading economic indicators and the rapid retreat in headline inflation and inflation expectations, the ECB response looks not exactly overwhelming”.

Mr Trichet stressed it was important to “maintain discipline” in macroeconomic policy and argued European and global leaders should look to beef up economic surveillance regimes to avoid the re-emergence of the imbalances that led to the financial market crisis.

Eurozone economic activity has contracted sharply since the collapse of Lehman Brothers in mid-September, and economists expect the deterioration to continue well into 2009.

Germany on Thursday reported industrial orders plummeted by 8 per cent in September alone, led by export orders: the biggest monthly drop since reunification. Mr Trichet acknowledged eurozone demand was sluggish, although he stopped short of talking of “recession”.

Annual eurozone inflation rates could even fall below zero as a result of the effects of tumbling oil prices on year-on-year comparisons. The ECB aims to keep the annual rate “below but close” to 2 per cent.

The ECB president said he still did not see a “credit crunch” in the eurozone.

● The 50 basis point rate cut will not be enough to boost the economy and a similar cut will probably come before the end of the year, Christine Lagarde, the French economy minister, said, Reuters reports. Asked if she thought Thursday’s move would be sufficient, Ms Lagarde said: “Clearly not.”