LONDON (MarketWatch) - The European Central Bank delivered another rate cut Thursday, dropping its benchmark lending rate by half of a percentage point to 2% in the face of a sharp and worsening recession.
The cut matched expectations.
Attention now turns to ECB President Jean-Claude Trichet's monthly news conference at 8:30 a.m. Eastern in Frankfurt.
Signs of potential divisions on the ECB Governing Council had made forecasting the outcome of the meeting more difficult than usual, economists said.
After slashing the ECB's key lending rate by an unprecedented 75 basis points, or three-quarters of a percentage point, to 2.5% in December, Trichet signaled that the ECB might be content to stand pat in January to reflect on the impact of 175 basis points worth of cumulative rate cuts since October.
Trichet later appeared to open the door to a potential cut, but contrasting remarks by ECB officials left observers to ponder potential divisions on the council. Indeed, Trichet in his December news conference had refused to say whether the rate decision had been unanimous -- in contrast with previous meetings.
But economists had warned that a steady stream of dire economic data was likely to leave little choice but to come through with at least a quarter-point cut.
In the latest dose of grim economic news, Wednesday's 7.7% annualized decline in euro-zone industrial production in November portrayed a manufacturing sector under severe pressure, economists say.
Indeed, even assuming flat industrial output in December, fourth-quarter production is set to show a contraction of 3.6% -- the weakest quarterly output since the current statistical series began in 1975, said economists at Barclays Capital.
UniCredit MIB economist Marco Valli said the data point to a fourth-quarter contraction in GDP of 1.5%. The economy shrank by 0.2% in the second and third quarters.
That's not all. Euro-zone consumer and business confidence gauges fell to record lows in December, and a closely-watched purchasing managers index for the manufacturing sector showed activity shrank at its fastest pace since the survey began in 1998, noted Howard Archer, chief European economist at IHS Global Insight.
Credit conditions are also tight.
Meanwhile, falling oil prices have allowed consumer price inflation to slow sharply to an annual rate of 1.6% in December. That's a dramatic fall from the record high of 4% notched this summer and below the ECB's medium-term target of near but just below 2%.
On top of that, spreads between euro-zone government bonds have widened sharply this week after Standard & Poor's warned it might downgrade the sovereign credit ratings of Portugal and Spain - and did cut the rating of Greece. That makes it more expensive for those countries to finance debt, just as budget deficits are set to expand due to slowing tax receipts and efforts to stimulate stagnating economies.
