European Central Bank cuts rates to 2%

The European Central Bank slashed its main interest rate by half a percentage point to 2% on Thursday -- but signaled that it would slow the pace of future cuts -- as it sought to protect the 330 million people in the 16 countries that use the euro against a deepening recession.

The unanimous decision by the bank’s governing council was in line with market expectations and left the rate at its lowest level since December 2005. It followed a cut of three quarters of a point last month.

ECB President Jean-Claude Trichet said there remained clear evidence that the euro-zone economy was experiencing “a significant slowdown,” with little hope for a turnaround this year.

“I see 2010 as the year of the recovery and the pickup,” Trichet said. “We will continue to monitor very closely the developments ahead,” as the level of uncertainty also continues to be exceptionally high, especially because of the financial market turmoil, he said.

Still, Trichet’s comments suggested that the ECB might take a pause from rate cuts in February and resume in March, analysts say.

Trichet said inflationary pressures in the euro area had lessened because of global economic weakness and lower commodity prices.

“Demand is likely to be lower for a protracted period,” he said.

The ECB has now reduced interest rates on four occasions since October from a high of 4.25%, though it has stopped short of the more aggressive cuts enacted by the U.S. Federal Reserve and the Bank of England.

On Wednesday, Germany’s Federal Statistical Office offered a rough preliminary estimate that the country’s economy -- Europe’s biggest -- may have shrunk by as much as 2% in the fourth quarter. It said Germany’s annual growth last year was 1.3%, only about half the previous year’s level.

The euro-zone economy was already officially in recession even before the worst of the financial crisis in October, having slumped 0.2% in both the second and third quarters of 2008. The accepted definition of a recession is two consecutive quarters of negative growth.

Germany 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 after a 0.3% drop in the second quarter.