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Dimming growth to prompt ECB rate cut next year -Reuters poll

Andy Bruce
Wednesday, 31 Oct 2012 | 5:05 PM ET

* ECB to cut rates early in 2013, say economists

* 80 percent chance ECB will hold rates next Thurs

* Economists still foresee Spain sovereign bailout

LONDON, Oct 31 (Reuters) - Flagging growth prospects for the euro zone's biggest economies will prompt the European Central Bank to ease monetary policy more early next year, according to a slim majority of economists polled by Reuters.

While the survey gave an 80 percent chance the ECB will hold its main refinancing rate at 0.75 percent next Thursday, most of the 73 analysts polled expected it will be cut to a new record low of 0.5 percent within the next few months.

That view was unchanged from a poll two weeks ago.

Europe is expected to remain the biggest drag on the world economy next year, as its sovereign debt crisis continues to stew -- a situation that has persuaded more economists the ECB will take more action to spur the euro economy.

In common with previous polls, most analysts said they expected Spain will become the next country to be bailed out by the European Union, and probably by the year's end.

``Recent business surveys have been weak, suggesting a deeper contraction in Q4 2012. Germany is not immune to the slowdown as indicators deteriorate,'' said economists Thomas Costerg and Sarah Hewin at Standard Chartered.

``We think the ECB will address the growing downside risks by cutting the refi rate further. The refi rate should then stay at 0.5 percent for the foreseeable future.''

Twenty-five of 73 economists said the ECB would cut rates by the end of this year, while 40 said such a move would come by the end of the first quarter.

Economic data on Wednesday, released after the end of polling, further supported the views of the economists who expect another rate cut, although most agree another 25 basis point cut won't make much difference on its own.

Inflation eased in October to 2.5 percent, according to a preliminary estimate, while the unemployment rate hit a new record high in September of 11.6 percent, as an extra 146,000 euro zone citizens lost their jobs.

``We have pencilled an interest rate cut to 0.50 percent in December on the assumption that continuing weak economic data and surveys will gradually convince the ECB that lower interest rates are warranted,'' said Howard Archer, chief UK and European economist at IHS Global Insight.

In common with previous polls, most economists -- 38 out of 59 -- said they thought Spain would end up applying for a full sovereign bailout, probably by the end of the year.

The remainder said no, although several of them predicted something short of a full sovereign bailout.

Spain fell deeper into recession in the third quarter and prices rose sharply in October, piling pressure on the government to revive a paralysed economy as it stalls over requesting aid.

``The market tension eased a bit after the ECB announced a plan of bond purchases. However, we expect that Spain will ask for financial aid to qualify for the bond-purchase programme,'' said Tomas Holinka from Moody's Analytics.

Given the likelihood of a bailout, 42 out of 61 analysts said Spanish and Italian government bond yields are unlikely to revisit their highs touched earlier this year.

(Polling by Rahul Karunakar and Somya Gupta. Editing by Jeremy Gaunt.)