ECB Cuts Rates, Staff Predict Bad Recession

The cut would not likely be the last one, but ECB might pause before the next cut, economists said.

The European Central Bank cut interest rates to an all-time low on Thursday, and signalled further reductions were possible as its staff forecast the euro zone economy could contract by over three percent this year.

The ECB kept up its record pace of reductions with the 50 basis point cut to 1.5 percent as the economy slides deeper into recession. Bank President Jean-Claude Trichet noted it had now slashed borrowing costs by 275 basis points since October, saying he could not exclude further moves.

Inflation would remain below target this year and next, he told a news conference. "Inflation rates have decreased significantly and are now expected to remain well below two percent over 2009 and 2010," he told a news conference.

Asked if rates had hit the bottom, he said: "We did not decide ex ante that this was the lowest point that we could attain. Further decisions will depend on facts, figures, judgement on the basis of Governing Council discussions."

Staff economists at the ECB were gloomy about the outlook for the 16-nation euro zone, expecting a much sharper contraction this year than previously and only tentative recovery in 2010.

Their new quarterly projections saw GDP contracting by 2.2 to 3.2 percent this year, compared with the previous estimate of -1.0 to 0.0 percent, giving a midpoint of a 2.7 percent fall.

The bloc's economy may grow again in 2010. The staff forecasts ranged from a GDP drop of 0.7 percent to a rise of 0.7 percent next year, for a midpoint of zero. That was significantly lower than the 0.5-1.5 percent growth forecast made in December.

SEVERE DOWNTURN

The current drop in inflation was "reflecting the severe downturn in economic activity", he said. Inflation in the bloc was 1.2 percent in February, well under the ECB's target of below, but close to 2 percent.

Recent economic data had added "further evidence to our assessment that both global and euro area demand are likely to be weak in 2009. Over the course of 2010 (it) is expected to gradually recover", Trichet said.

Official data on Thursday confirmed the euro zone's economy suffered the worst quarter on record at the end of 2008. Other surveys have also shown confidence is at an all-time low, while the bloc shed more than quarter of a million jobs in January.