FRANKFURT, Dec 11 (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.
Some economists thought the ECB would be even more cautious. "After Mr Stark's comments the likelihood for an ECB rate cut pause in January has risen, or the ECB may decide to cut only by 25 basis points," said Commerzbank analyst Michael Schubert.
"Whereas ECB Council members have been very reluctant in recent days to give hints about the exact timing of another rate cut... Juergen Stark indicated that the ECB may decide not to cut rates in January."
Schubert noted that another ECB Council member, Yves Mersch of Luxembourg, had made similar comments last week.
ECB Executive Board member Gertrude Tumpel-Gugerell took a more neutral line than Stark, echoing comments from President Jean-Claude Trichet, and she did nothing to encourage any expectations of rate cuts.
"We have given no signals on future interest rate steps," she told Germany's Handelsblatt daily in an interview. "We are observing developments further and do not wish to announce anything for the future, nor rule anything out."
However, economists believe not all ECB officials share Stark's view. Christian Noyer of France and Ewald Nowoty of Austria, for instance, might feel otherwise.
"It probably ends the chance of a 50 basis point cut next month but if you read Noyer and Nowotny yesterday, you get the feeling that the ECB is very split," said UniCredit analyst Aurelio Maccario.
"They are clearly considering seriously the idea of shifting gears, although it would be difficult to slow down after having just raised the pace of the easing."
However, Erkki Likkanen of Finland, even talked on Thursday about raising rates; albeit after the worst of the recession is over and special measures have passed.
"We have to remember that when the amount of money has been increased, we have to raise interest rates quickly so that inflation will not go up when the economy gets going again," he said at the Finnish Institute of International Affairs.
Elsewhere on Thursday, the Swiss National Bank slashed its interest rates by half a percentage point, taking its target to just 0.5 percent, as the global economic downturn tips Switzerland into recession. (Reporting by Paul Carrel, Marilyn Gerlach, Kirsten Donovan, Tamawa Desai, Marc Jones, Sakari Suoninen)