FRANKFURT, Germany - The European Central Bank slashed its main interest rate by a half percentage point to 2 percent on Thursday -- but signaled it would slow the pace of future cuts -- as it sought to protect the 330 million people in the 16 countries that use the euro against a deepening recession.
The unanimous decision by the bank's governing council was in line with market expectations and left the rate at its lowest level since December 2005. It followed a three-quarter point cut last month.
ECB President Jean-Claude Trichet told reporters after the bank's announcement there remains clear evidence the euro zone economy is experiencing "a significant slowdown" with little hope for a turnaround this year.
"I see 2010 as the year of the recovery and the pickup," Trichet said. "We will continue to monitor very closely the developments ahead," as the level of uncertainty also continues to be exceptionally high, especially due to the financial market turmoil, he said.
Still, Trichet's comments suggested the ECB may take a pause from rate cuts in February and resume cutting them in March, analysts say.
"Our next important rendezvous will be in March, even if we are not precommitted" to indicate future interest rate moves, Trichet said told reporters.
UniCredit economist Aurelio Maccario said the comments point strongly to the ECB holding rates steady in February.
"The bottom line: a clear rate signal for (a February pause) and the pre-announcement of a March move, when the revised gross domestic product and consumer price index projections should look ugly enough to warrant a 50 basis point cut," Maccario said in a research note.
"Whatever the cruise speed, we remain convinced rates need to fall to 1 percent by midyear. But to get there, we probably need to see the ECB starting at least to mention downside inflation risks at the policy relevant medium-term horizon," Maccario said.
Trichet said inflationary pressures in the euro area had lessened because of global economic weakness and lower commodity prices. "Demand is likely to be lower for a protracted period," he said.
Inflation in fact dropped to an annual rate of 1.6 percent in December, below the ECB's mandate to keep inflation "close to, but less than 2 percent" for the first time since August 2007.
The news of the rate cut caused the euro to fall against the dollar, to $1.3072 in Frankfurt afternoon trading Thursday from the $1.3143 in morning trading. The euro traded at $1.3159 late Wednesday in New York. Currencies generally drop on interest rate reductions as investors seek higher returns elsewhere.
The ECB has now reduced interest rates on four occasions since October from a high of 4.25 percent, though it has stopped short of the more aggressive cuts enacted by the U.S. Federal Reserve and the Bank of England.
In an unprecedented move last month, the Fed ratcheted down its rate to hover between zero and 0.25 percent. The Bank of England cut its rate last week by half a percentage point to 1.5 percent.
"Despite some apparent earlier reluctance to cut interest rates significantly in January after reducing them by 175 basis points over the previous three months, the ECB really had little option but to act again given the clear, widespread evidence that the euro zone recession is deepening," IHS Global Insight economist Howard Archer said after Thursday's decision.
With euro zone inflation heading lower, "the ECB had ample scope to cut interest rates further," Archer argued.
Business confidence surveys have also pointed to a deep recession in the 16-nation single currency zone -- Slovakia joined at the start of the year. A survey last week from the European Commission revealed that overall economic confidence slid to a record low in December.
On Wednesday, Germany's Federal Statistical Office offered a rough preliminary estimate that the country's economy -- Europe's biggest -- may have shrunk by as much as 2 percent in the fourth quarter. It said Germany's annual growth last year was 1.3 percent, only about half the previous year's level.
The euro zone economy was already officially in recession even before the worst of the financial crisis in October, having slumped 0.2 percent in both the second and third quarters of 2008. The accepted definition of a recession is two quarters of negative growth.
Germany and Italy both slipped into recession in the third quarter but France bucked the trend, posting a 0.1 percentage point quarterly increase in output during the period following a 0.3 percent drop in the second quarter.
