Eurozone interest rates cut to 2%

ECB President Jean-Claude Trichet has had much to ponder

The European Central Bank (ECB) has cut eurozone interest rates by half a percentage point to 2%.

The ECB has now reduced rates four times from 4.25% in September as it continues efforts to bolster the eurozone economy.

According to official figures, the eurozone has been in recession since September of last year.

The latest rate cut also affects Slovakia, which this month became the 16th country to adopt the euro.

If we get more significant disappointments coming through, the market will continue to look for further rate cuts Dresdner Kleinwort economist Rainer Guntermann

Eurozone's key interest rate is now at its lowest level since December 2005.

However, they remain above the current UK rate of 1.5%, and between 0% and 0.25% in the US.

Explaining the latest rate cut decision, ECB chairman Jean-Claude Trichet said the level of economic uncertainty across the eurozone area remained "exceptionally high".

"There is clear further evidence to the assessment that the euro area is experiencing a significant slowdown largely related to the effects of the intensification and broadening of the financial turmoil," he said.

Lower inflation

The half-point rate reduction was broadly expected by analysts.

It comes as official figures showed that eurozone inflation fell to a 26-month low in December, thanks to a big decline in the price of energy bills.

Analysts say the fall in inflation gave the ECB room to cut rates still further without worrying that the move might lead to price rises.

However, with European banks still reluctant to lend to both individuals and consumers, it is unclear how much of an impact the latest cut in interest rates will have on lifting the economy.

"There may be a pause or smaller cut in February, but it will all depend on the data flow," said Dresdner Kleinwort economist Rainer Guntermann.

"If we get more significant disappointments coming through, the market will continue to look for further rate cuts."

Fellow analyst, Howard Archer of IHS Global Insight, said he expected eurozone interest rates to fall to 1% by the summer.

A December study by research group Markit said that business activity across the eurozone was at its lowest level on record.

An economy is generally considered to be in recession following two consecutive quarters of falling output.