ECB cuts rates by 50 basis points

The European Central Bank cut its benchmark interest rate by 50 basis points to two per cent yesterday, matching its lowest-ever rate as inflation plummets and recession spreads.

The cut, in line with consensus forecasts, marks the fourth in just over three months amid signs that the financial crisis is biting hard into the real economy and inflation threatens to fall further below the ECB's two per cent target.

Economists said today's cut would not likely be the last, but the ECB might pause before the next move.

"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."

Before the decision, some analysts had forecast the ECB would leave rates on hold and others had expected a smaller, 25 basis point move. Financial markets had priced in 50 basis points or more.

Borrowers will now be looking for equivalent cuts in bank loan interest rates. After the last ECB rate cut, which was a substantial 75 basis points, the Governor of the Central Bank, Michael Bonello, and Finance Minister Tonio Fenech had both urged local banks to pass on the full benefit of the cut to consumers. The subsequent retail bank reductions, however, fell a few basis points short of that.