European Central Bank President Jean- Claude Trichet signaled policy makers may cut their benchmark interest rate by half a percentage point to a record low of 1.5% next month as a recession in the euro region deepens.

``I don't exclude that we could reduce interest rates at our next decision,'' Trichet said at a press conference in Frankfurt after leaving the key rate at 2% today. When asked whether the ECB will cut by a half or a quarter point, Trichet noted market expectations ``would probably more be the first figure.''

The ECB has so far been reluctant to adopt the more aggressive path of central banks from Washington to London and Trichet today ruled out cutting rates to zero for now. The Bank of England lowered its benchmark to 1% today, the lowest since it was founded in 1694, and the Federal Reserve has reduced its benchmark almost as far as it can.

Trichet confirmed that ``a 50 basis point rate cut in March is absolutely in the pipeline,'' said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan. ``While he may have said zero rates are not imminent, he didn't rule out that they may be appropriate at a later stage. It certainly shows that the debate is lively and controversial.''

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.

Inappropriate for now

Trichet said a ``zero rate doesn't seem to us appropriate at this stage.'' While today's decision was unanimous, ``it doesn't mean that we all have the same view,'' he said.

Central banks in South Africa and the Czech Republic joined the UK in cutting interest rates today to fight the global slump.

South Africa's central bank cut its benchmark rate by 1 percentage point, the biggest reduction in more than five years, to 10.5%.
The Czech central bank lowered the key rate for the third consecutive time, by half a point to 1.75%.

When pressed on the ECB's intentions for March, Trichet declined to comment further, saying policy makers would give ``no pre-commitment on anything.'' Still, he said price pressures in Europe are waning and uncertainty across the economy ``remains exceptionally high.''

His policy statement omitted last month's comment that inflation risks are ``broadly balanced.''

That's ``very important,'' said Ken Wattret, chief euro-area economist at BNP Paribas in London. ``It's a baby step toward recognizing that the downside risks are much bigger than the upside risks, which they clearly are.''

Slowing inflation

Inflation, which the ECB aims to keep just below 2%, is slowing rapidly. The rate dropped to 1.1% in January, the lowest since July 1999 and down from a 16-year high of 4% just seven months ago.

At the same time, Trichet said inflation expectations remain ``anchored,'' signaling the bank does not yet see a threat of deflation.

Europe is sliding into its worst recession since World War II. Spain's industrial production plunged by 19.6% in December from a year earlier, a report showed today. In Germany, Europe's largest economy, factory orders extended their worst slump on record.

Europe's service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook fell to a record low. The International Monetary Fund predicts the euro region's economy will contract 2% this year.

Bloomberg News