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ECB cuts key rate to record low of 2% as slump deepens

THE European Central Bank cut its benchmark interest rate by half a percentage point to 2 percent, matching a record low, as the deepening recession pressed policy makers into action.

The reduction, the fourth in as many months, was in line with the median forecast of 60 economists in a Bloomberg News survey. The rate was last at this level between 2003 and 2005. The Frankfurt-based central bank, which took charge of monetary policy in 1999, will cut the benchmark to 1.5 percent in March, another survey of economists shows.

President Jean-Claude Trichet last month said there's a limit to how far the ECB can cut rates and refused to give any signal for this month, suggesting he favored a pause. At the same time, the economy of the 16 euro nations is deteriorating more rapidly than the ECB anticipated as the global financial crisis hurts exports, damps spending and threatens credit ratings in the region.

"The ECB really had little option but to act again given the clear, widespread evidence that the euro-zone recession is deepening," said Howard Archer, chief European economist at IHS Global Insight in London. "We suspect that the ECB will trim interest rates further in February and bring them down to 1 percent by mid-2009."

The euro dropped almost a cent to US$1.3087 after the decision.

The ECB still has the highest rates among the Group of Seven industrialized nations. The United States Federal Reserve, the Bank of England and the Swiss central bank have cut borrowing costs more aggressively as the world's largest economies slide simultaneously into recession for the first time since World War II.

The BOE on January 8 reduced its main lending rate to 1.5 percent, the lowest since it was founded in 1694. The Fed last month lowered its key rate to a target range of zero to 0.25 percent. Japanese and Swiss rates are also close to zero. Canada's rate is at 1.5 percent. The ECB has trimmed its benchmark by 225 basis points since early October. Last month it lowered the rate by 75 points, its biggest step ever.

Trichet last month said the bank was focused on making sure its easing to date flowed through to the economy. It wanted to avoid being "trapped" with rates that are "too low," he said. Executive Board member Juergen Stark on December 10 said the scope for further moves was "very limited."


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