Rate cuts in air as Trichet prepares to say farewell

European Central Bank chief Jean-Claude Trichet chairs the last meeting of his eight-year term Thursday with analysts expecting him to signal rate cuts to stave off a recession threatened by the debt crisis. Central bank chiefs from the 17 eurozone countries gather in the German capital for one of their twice-yearly meetings outside Frankfurt and rate cuts are hanging in the air as the eurozone lurches ever deeper into turmoil. However, ECB watchers are divided as to the timing of such a move and whether the guardian of the single currency will choose to act as early as Thursday or keep its gunpowder dry for later this year. Trichet, who retires at the end of October after eight years at the helm, could not be leaving at a more difficult time for both the ECB and the euro. In the 68-year-old Frenchman's own words, Europe is facing its "deepest financial crisis since World War II". Until as recently as just over a month ago, the situation could not have been more different -- after already raising borrowing costs twice this year to keep inflation in check, ECB interest rates looked set to remain on an upward trajectory. However, concerns that the snowballing debt crisis could crash economic growth forced the bank to call a halt to the cycle of monetary tightening and the ECB's decision-making governing council held key rates steady at 1.50 percent at last month's meeting. The situation has since deteriorated so dramatically that a poll of leading economists by the business daily Handelsblatt showed the majority in favour of an immediate cut in rates in order to avert outright recession. Because the ECB traditionally likes to prepare any moves in interest rates very carefully in advance, the majority of ECB watchers are convinced it would be too early to expect a rate cut as early as Thursday. "We see a 35-percent chance for a quarter-point rate cut at this meeting," said Christian Schulz, senior economist at Berenberg Bank. But "even if Trichet does not announce a cut, we expect him to clearly signal that the ECB is prepared to act to counter the economic deterioration," Schulz said. Jennifer McKeown at Capital Economics agreed. "Talk that a rate cut might come as soon as this month may be premature," she said. "For now, we're continuing to pencil in quarter-point cuts in December and March." IHS Global Insight chief economist Howard Archer said he too felt it was too early to expect a rate cut. "Despite the risk of eurozone recession seemingly growing by the day, the ECB seems likely to hold off cutting interest rates on Thursday ... A cut is a possibility rather than a probability."