The European Central Bank kept interest rates unchanged after four reductions since early October as officials gauge the severity of the recession before cutting borrowing costs again. Policy makers meeting in Frankfurt left the benchmark lending rate at 2 percent, as forecast by all but one of 53 economists in a Bloomberg News survey. The ECB will cut the rate to a record low of 1.5 percent in March, another survey shows. ECB President Jean-Claude Trichet has signaled a reluctance to follow the U.S. Federal Reserve in lowering rates to close to zero, even as Europe finds itself in the grips of its worst recession since World War II. At the same time, Trichet signaled as recently as Jan. 28 that the slowdown will probably force the ECB to act again next month. “They really haven’t grasped the severity of the recession,” said Laurent Bilke, an economist at Nomura International Plc in London, who used to work as a forecaster at the ECB. “Rates should be at 0.5 percent. They should have used the room they have much more forcefully.” The euro dropped to $1.2832 from $1.2869. Trichet holds a press conference at 2:30 p.m. to explain today’s decision. Separately, the Bank of England lowered its key lending rate by half a percentage point to 1 percent, the lowest since the Bank’s creation in 1694. ‘They Are Wrong’ While the ECB has chopped 2.25 percentage points off its benchmark, the most aggressive easing in the bank’s 10-year history, it still has the highest rates among the Group of Seven industrialized nations. Trichet said last week that the ECB’s next “important” meeting will be in March, suggesting it may resume cutting rates once it has its new quarterly economic projections. That wait-and- see approach is opening the ECB to criticism that it’s not acting fast enough to protect its economy. “They are wrong, they are doing too little, too late,” Nouriel Roubini, the New York University Professor who predicted the global financial crisis, said in a Bloomberg Television interview yesterday. “They are making the situation worse.” Europe’s service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook fell to a record low. Spain’s industrial production plunged by 19.6 percent in December and in Germany, Europe’s largest economy, factory orders extended their worst slump on record. The International Monetary Fund predicts the economy of the 16 euro nations will contract 2 percent this year. Slowing Inflation Inflation, which the ECB aims to keep just below 2 percent, is also slowing rapidly. The rate dropped to 1.1 percent in January, the lowest since July 1999 and down from a 16-year high of 4 percent just seven months ago. While ECB officials have said inflation may approach zero later this year, they expect it to pick up in the second half and have dismissed the risk of deflation. “Deflation is less likely” in Europe than in the U.S., council member Erkki Liikanen said Jan. 30. “We should keep that in mind when discussing how low the ECB benchmark rate can go.” Cabin crew at Deutsche Lufthansa AG, Europe’s second-largest airline, last week went on strike at airports in Berlin and Frankfurt in pursuit of a 15 percent pay increase and bigger bonuses. Workers at German railway company Deutsche Bahn AG this month won a 4.5 percent wage increase after strikes disrupted services across the country. ‘Dangerous’ Fallacy Council member George Provopoulos said in an interview on Jan. 16 that the scope for further rate cuts is “limited” and markets would be wrong to bet on the benchmark dropping to 1 percent. Investors expect the ECB to lower its key rate to 1.25 percent next month, Eonia forward contracts suggest. Athanasios Orphanides is the only ECB council member so far to have advocated the idea of zero rates. The suggestion that monetary policy becomes ineffective when rates are close to zero is a “dangerous” fallacy, Orphanides said in a Jan. 28 speech. The ECB council “has difficulties with radical moves,” said Holger Schmieding, chief European economist at Bank of America Corp in London. “It needs more time to think things over.”

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