ECB policymakers try to cool rate cut expectations

FRANKFURT (Reuters) - European Central Bank policymakers tried to cool expectations that they would make another big interest rate cut next month, forcing markets on Thursday to rethink their bets on lower rates.

Switzerland cut its rates on Thursday for a fourth time in two months as most of Europe heads into recession. But ECB officials played down the chances of a similarly bold move in the euro zone early in the New Year, and some economists began to doubt they would cut at all in January.

ECB policymakers stress that they have already lowered rates by a total of 1.75 percentage points since October in three steps, culminating in a record three quarter point move to 2.5 percent last week.

But now some members of the Governing Council are signalling that the ECB cannot keep up this pace.

Executive Board member Juergen Stark set the tone late on Wednesday. "After this substantial rate cut, the remaining room for manoeuvre is very limited, potentially allowing for small steps only," he said at Germany's Tuebingen university.

Euro zone inflation has tumbled to 2.1 percent, only just above the ECB's ceiling, but Stark said the Council still needed more data before deciding further policy moves.

"New relevant information for the euro area which allows for a serious reassessment of the outlook for price stability will very likely not be available before February or March 2009," he said.

Markets reacted on Thursday to the policymakers' comments. Figures derived from Eonia rates still showed the market pricing around a 70 percent chance of a half point cut in January, according to Nomura.

But they now show the market expecting the ECB's rate cutting cycle to bottom out at 1.75 percent, higher than the 1.5 percent priced after last Thursday's cut. The euro also spiked up immediately after Stark made its comments.