FRANKFURT, Nov 6: The European Central Bank and Britain slashed their key interest rates on Thursday in a dramatic escalation of efforts to stave off recession, as the IMF predicted the US economy would shrink next year.

While the ECB’s decision to reduce its main lending rate by half a percentage point to 3.25 per cent was expected, the Bank of England’s move to cut by a record 1.5 percentage points to 3.0 per cent stunned analysts who said it could indicate things were even worse than previously thought.

“The fear is now that the situation could be dire than first perceived,” said Joshua Raymond, market strategist at City Index.

The British economy is on the verge of a recession after contracting for the first time since 1992 in the third quarter and the European Commission forecast this week a similar fate awaited the 27-nation bloc by year’s end.

The ECB’s main lending rate serves as a benchmark for lending by commercial banks to businesses and households throughout the 15-nation zone that uses the euro currency.

On October 8, the ECB cut its rate by a half a percentage point in an exceptional coordinated move with the US Federal Reserve and five other central banks to boost battered financial markets.

After the latest announcement, ECB president Jean-Claude Trichet did not rule out another cut in interest rates. “I don’t exclude that we could decrease rates again,” Trichet said.

Two other European countries which do not use the single currency, Denmark and Switzerland, also announced cuts in their main rates.—AFP