ECB Stays Restrained, Cuts by Only Half a Point

The European Central Bank was unimpressed by the Bank of England's deep cut in interest rates, shaving half a percentage point off its key rate to 3.25 percent as widely expected on Thursday.

But ECB President Jean-Claude Trichet admitted that a bigger cut was discussed.

"We discussed several options. Options of diminishing rates by 50 basis points, options of diminishing rates by 75 basis points. All taken into account, after having checked and discussed the pros and cons of those different options, we decided unanimously it was appropriate to decrease by 50 basis points," Trichet told a news conference.

Earlier on Thursday, the Bank of England slashed its key interest rate by one-and-a-half percentage points -- the biggest cut since it became independent in 1997 -- to 3 percent as recession fears heightened and despite inflation hovering above 5 percent.

"Let's face it, the central banks do get it now… we're looking at the great recession for the moment," Lena Komileva, chief economist at Tullett Prebon, told CNBC before the ECB decision.

But coordinated action is difficult to achieve, and the situation in the euro zone is different from that in the UK, others said.

"It's harder to get a consensus among the ECB people than it is with the British. The British had further to go down, and conditions in Britain are deteriorating more rapidly than on the continent," Robert Hormats, vice chairman of Goldman Sachs, said.

The Bank of England said inflation was likely to fall as food and energy prices have come down, and analysts added that rising unemployment following layoffs will also put a lid on price rises.

The European Commission said on Monday that the euro zone is already in a technical recession and predicted economic growth will come to a virtual standstill next year.

The euro zone's economy, which had grown steadily since the bloc's creation in 1999, contracted by 0.2 percent in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures on Nov. 14.

Business confidence in Europe's major economies is at record lows due to the recent intensification of the financial crisis and as it suffers the hangover of record inflation and a jump in the strength of the euro over the summer.

"We expect clear hints on further rate cuts in the months ahead as the ECB still has some work to do to get ahead of the curve," ING Bank analyst Carsten Brzeski wrote in a market note.

Trichet said inflation rates are likely to continue to decline in the following months, but that was important that second-round effects should be avoided.

Protectionism and "disorderly developments" are among the downside risks to the economy, Trichet said.

© 2008 CNBC.com