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European Central Bank cuts rates 1/2 percentage point
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FRANKFURT (Reuters) — The European Central Bank cut its benchmark interest rate by half a percentage point to 2.0% Thursday, matching its lowest-ever rate as inflation plummets and recession spreads.

The cut, in line with forecasts, is the fourth in just over three months amidst signs the financial crisis is biting hard into the economy and inflation looks like it will fall further below the ECB's 2% ceiling .

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

"There may be a pause or smaller cut in February, but it will all depend on the data flow," Dresdner Kleinwort economist Rainer Guntermann said.

"If we get more significant disappointments coming through, the market will continue to look for further rate cuts."

Some analysts had forecast the ECB would leave rates on hold and others expected a smaller, 25-point move, while financial markets had priced in 50 basis points or more.A basis point is one hundreth of a percentage point.

ECB President Jean-Claude Trichet is expected to justify the rate cut by pointing to the diminishing upside risks to inflation, which fell to 1.6% in December, and a contraction in domestic demand and tighter financing conditions.

The ECB also set new rates for its overnight facilities, after announcing in December it would increase the gap between these rates and the benchmark rate to back to 100 basis points.

Beginning Jan. 21, funds borrowed from its marginal lending facility will attract an interest rate of 3.0% and overnight deposits will pay 1.0%.

The euro was little changed against the dollar after the cut and was trading at 1.3165.

It had hit a nearly five-week high Wednesday at $1.3091after lackluster retail data suggested the U.S. economy contracted faster than thought in the fourth quarter.

Inflation in the euro zone has fallen rapidly in recent months and was 1.6% in December, compared with the ECB's goal of keeping inflation below, but close to 2%.

Economists expect inflation to fall further and some of them have warned of deflation, as falling prices could make already cautious consumers even more jittery and cut spending.

While rates at 2.0% match the lowest level in the 10-year history of the ECB in historic terms, they pale alongside almost-zero borrowing costs in the United States and Japan, as well as a British central bank thought to be headed in a similar direction.

The numbers on the euro zone have got worse by the week since the bloc was confirmed as in recession late last year.

Recent data showed Germany's economy, the euro zone's biggest, likely shrank 1.5% to 2.0% in the fourth quarter of 2008 and officials there have signalled this year will see the worst contraction since World War II.

Industrial production has also plummeted across the 16-country bloc in recent months.

Copyright 2009 Reuters Limited.
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