The European Central Bank is widely expected to cut interest rates again on Thursday, amid increasingly grim economic data and a sharper than expected drop in inflation, although the size of the reduction remains unclear. Financial markets believe the Frankfurt-based bank will reduce its benchmark rate by half a percentage point to 2.0 percent, which would be its lowest level since December 2005, in an attempt to steer the euro zone economy away from a deep and prolonged recession. However, forecasters remain on edge about the decision as leading ECB officials, including Jean-Claude Trichet, the ECB's president, indicated some reluctance about cutting rates further after the last meeting in early December. Even though the ECB has reduced interest rates on three occasions since October from a high of 4.25 percent, its actions have been dwarfed by the more aggressive cuts enacted by the U.S. Federal Reserve and the Bank of England. “We join markets in fearing the ECB will cut rates by less - a fear fueled by comments from some members after last month's meeting,” said David Page, European economist at Investec Securities. In the immediate wake of last month's meeting, where the benchmark rate was reduced by a record three-quarters of a percentage point, Yves Mersch, the Luxembourg Central Bank president and a member of the ECB governing council, said “we have made a great step and now for the time being there will be a pause.” However, most forecasters think that comments like Mersch's have been overtaken by events and the tone coming out of the European Central Bank since has been far more dovish, making a rate cut more likely. Trichet himself has acknowledged there are risks to growth. Business confidence surveys have pointed at a deeper than anticipated recession in the now 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. The euro zone economy was already officially in recession even before the worst of the financial crisis in October, having slumped by 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, the euro zone's largest single economy, 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. Inflation dropped to an annual rate of 1.6 percent amid sliding oil and commodity prices.
