Money world

Europe’s central banks cut interest rates as policy makers stepped up their response to the credit crisis that has pushed the region into a recession.

The European Central Bank delivered a 75 basis-point reduction in its main refinancing rate, the most in its 10-year history, while the Bank of England cut its benchmark rate to 2 percent, the lowest level since 1951. The Swedish and Danish central banks also lowered their key rates.

Central banks are battling to contain the economic damage as the 17-month credit drought weighs on companies and consumers around the world. The biggest advanced economies are already set for their first simultaneous recession since the Second World War, the International Monetary Fund forecasts.

“Policy makers are moving toward historically low levels of interest rates and they probably won’t stop there,” said Paul Dales, an economist at Capital Economics Ltd. in London. “We are going to see all central banks bring rates down as close to zero as they can get.”

Bank of England Governor Mervyn King discussed the possibility of lowering the U.K. rate to zero for the first time on Nov. 25 and said the biggest challenge he faces is renewing the flow of credit in the economy.

The U.K. economy may contract by 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25. Gross domestic product fell by 0.5 percent in the third quarter, the first drop in 16 years.

Global Pattern

Today’s moves in Europe are part of a global pattern. The U.S. Federal Reserve cut its key rate to 1 percent last month. New Zealand’s central bank cut its rate by a record 1.5 percentage points to 5 percent, and Bank Indonesia reduced its rate to 9.25 percent from 9.5 percent.

The Polish zloty dropped to a five-week low against the euro today, falling more than any other currency worldwide, after central-bank Governor Slawomir Skrzypek said policy makers may lower his country’s rates this month.

The ECB’s decision to accelerate the pace of rate cuts signals the governing council may be prepared to breach the 2 percent level it last reached in 2005, said Erik Nielsen, chief European economist at Goldman Sachs Inc online pay day loan. in London. The ECB lowered borrowing costs by 50 basis points in October and November.

“This probably undermines this idea that they have given us that 2 percent would be a longer-run floor,” Nielsen said in a Bloomberg Television interview. “By early next year, they might go through 2 percent.”

First Recession

Europe’s economy fell into its first recession in 15 years in the third quarter after the U.S. subprime mortgage crisis led to bankruptcies on Wall Street and pushed up lending costs worldwide, eroding the confidence of investors and consumers.

With oil prices collapsing, the euro-area inflation rate fell the most in almost 20 years, to 2.1 percent from 3.2 percent, giving policy makers more room to act on interest rates.

A bolder move from the ECB was “sorely needed,” said Holger Schmieding, chief European economist at Bank of America in London. The global economic downturn has caused an “unprecedented collapse in sentiment,” he added

Sweden’s Riksbank lowered its key rate by 1.75 percentage points, the biggest reduction in 16 years. The Danish central bank matched the ECB, cutting by 75 basis points.

Winston Churchill

The U.K. interest rate now matches the lowest in the central bank’s history. It was last at 2 percent when Winston Churchill’s victory in a general election made him prime minister for the second time.

“If this goes wrong we are just going to go sideways for the next decade,” Graeme Leach, chief economist at the Institute of Directors in London, said in a television interview.

Once interest rates reach zero, central bankers have to resort to other measures to stimulate the economy. Such steps may include expanding money supply and using it to finance government deficits or buying securities such as bonds or stocks, former policy maker Willem Buiter said this week.

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NEW YORK — Like their counterparts at the malls, online merchants finally got some relief with the unofficial start of the holiday shopping season, spurred by a bevy of deals and free shipping offers. But the stronger-than-expected bump in online sales Monday couldn’t cancel out a lackluster November.

Meanwhile, ShopperTrak RCT Corp., a research company that tracks retail sales for more than 50,000 outlets, released more data Wednesday showing that the better-than-expected sales boost on Friday, the traditional opening for the holiday shopping season at stores, fizzled quickly during the rest of the weekend — resulting in a mixed start to the season. And figures released by SpendingPulse, a data service provided by MasterCard Advisors that estimates U.S. retail sales across all payment forms including cash and check, pointed to more signs of a bleak November for the nation’s stores despite Friday’s surge. The grim numbers from SpendingPulse augured poorly for the monthly sales figures retailers were set to report today.

Internet research company comScore Inc. said Wednesday that online sales spiked 15 percent to $846 million on "Cyber Monday," which was named by the National Retail Federation in 2005 to describe the surge in online spending when customers returned to work after Thanksgiving and shopped from their desks cash advance payday loans.

Nielsen Online, a service of the Nielsen Co., reported a 10 percent increase in Web traffic to online shopping sites on "Cyber Monday," fueled by beauty items, toys and video games. Ken Cassar, vice president of industry insights for Nielsen Online, said in a statement that he expected Dec. 15 to be the peak day for online shopping traffic.

According to comScore, the four-day period from Friday through Monday saw e-commerce spending jump 13 percent as both weekend days and Monday all posted double-digit gains.

From Nov. 1 through Dec. 1, however, online spending fell 2 percent. Still, comScore Chairman Gian Fulgoni described the big boost as "extremely encouraging." ComScore forecasts that online spending for the holidays will be unchanged from last year, when sales rose 19 percent from 2006.

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Air Canada has turned to its former frequent flier program for a lifeline as it faces a looming cash crunch.

The country’s largest airline said yesterday that it has struck a deal with Aeroplan that will see the independently-owned loyalty program "accelerate" $70 million in payments to Air Canada for reward tickets that Aeroplan members have booked through the end of May.

Aeroplan, which was spun off as a separate company by Air Canada parent ACE Aviation Holdings Inc. three years ago, will now pay the money owed to Air Canada by the end of the year.

The loyalty program sells points to Air Canada and its other partners, including credit card companies and retailers, and then buys seats on Air Canada when its members redeem their Aeroplan Miles for rewards, earning a margin on each transaction.

"We are simply paying sooner than we normally would for flight rewards that have been issued and for which we already owe them funds," said JoAnne Hayes, a spokesperson for Aeroplan.

Air Canada reported a loss of $132 million in the third quarter and analysts have expressed concern that the airline is running low on cash as it enters a seasonally slow period for air travel credit score.

The airline has about $1 billion of cash on hand, which is the minimum executives say is needed to keep the airline operating.

While Air Canada might normally borrow money to see it through a difficult period, the ongoing credit crunch has closed off traditional sources of financing. The airline has said it will explore alternative sources of financing, including selling and leasing back aircraft.

Aeroplan’s spinoff removed a significant cash cushion for the airline during lean economic periods. Now, Air Canada must construct commercial contracts with Aeroplan to draw on the cash.

While Aeroplan said the agreement included "certain commercial arrangements" that were of mutual benefit, Hayes declined to comment on what the loyalty program would receive in exchange for the early payments.

Research Capital analyst Jacques Kavafian said Air Canada is believed to have agreed to up the minimum number of Aeroplan Miles it purchases from the loyalty plan. Air Canada shares fell 9.3 per cent.

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LONDON–A report in the Sunday Times that Microsoft Corp. is in talks with Yahoo Inc. to buy the U.S internet company’s online search business for $20 billion (U.S.) is "total fiction," according to a key executive cited by an influential U.S. blog.

The Sunday Times, which did not cite its sources, said the proposal involves a complex deal that would see the U.S. software giant support a new management team to take control of Yahoo.

The team would be led by ex-AOL chair and CEO Jonathan Miller and former Fox Interactive Media President Ross Levinsohn, the report said.

But the AllThingsDigital blog, affiliated with the Wall Street Journal, quoted Levinsohn as saying the report was "total fiction." Top sources at Yahoo and Microsoft also scoffed at the report, the blog said.

Yahoo spokesperson Brad Williams said: "We don’t comment on rumours, and all this is is a rumour."

A Microsoft spokesperson declined to comment.

Microsoft withdrew its $47 need cash.5 billion buyout offer for Yahoo in May after Yahoo CEO Jerry Yang and his board rejected the bid as too low.

Bid speculation was sparked again earlier this month when Yang announced he was stepping down. Microsoft CEO Steve Ballmer ruled a bid out at the time, but said he was "open" to talks on a deal for Yahoo’s search business.

Activist investor Carl Icahn – who sits on Yahoo’s board and increased his stake in the company to 5.4 per cent last week – reiterated he favoured the sale of the search business, according to an interview in the Dec. 1 edition of Barron’s.

Icahn began amassing Yahoo shares during the company’s merger talks with Microsoft.

The Sunday Times said senior directors at Microsoft and Yahoo are understood to have agreed on the broad terms of the deal, but there is no guarantee it will succeed.

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