By Krista Hughes
FRANKFURT, Feb 5 (Reuters) - The European Central Bank is expected to keep interest rates on hold on Thursday after four months of cuts, but financial markets are looking for signs of further steps it may take to shore up the euro zone economy. ECB President Jean-Claude Trichet all but dismissed the chance of a rate cut this month after the Governing Council's January decision, saying that the next important "rendezvous" for monetary policy would be in March.
As a result, all but three of 85 economists polled by Reuters expect the ECB to keep rates at 2.0 percent when its decision is announced at 1245 GMT. That level matches previous historic lows, but most economists expect another cut in March.
A majority expect the next reduction to be by 50 basis points. But economists are also braced for any hint from Trichet that the ECB may slow the pace of future easing, after more than halving the key euro zone interest rate in the last four months.
Nomura economist Laurent Bilke said investors were keen for signals on the size of the March cut when Trichet holds his regular news conference at 1330 GMT.
"That's the big question mark at the moment," said Bilke, who sees the ECB returning to smaller, 25-point moves. "They have not really given any clear information which would confirm either 25 or 50 basis points; we just know that it's reasonable to expect rate cuts."
Analysts will also scour Trichet's comments for signals on how low the ECB will go, given that central banks including the U.S. Federal Reserve, the Swiss National Bank and the Bank of Japan have already reduced credit costs below 1 percent. The Bank of England is expected to cut rates to 1.0 percent on Thursday.
Trichet and other ECB policymakers including Yves Mersch and George Provopoulos have cautioned against very low euro zone rates, but Cyprus central bank governor Athanasios Orphanides has exposed a difference of views on the Governing Council.
SPLIT ON ZERO
Orphanides created a stir by saying it was a fallacy that policy becomes ineffective when rates hit zero, and that central banks should not be shy of cutting rates aggressively to stave off economic shocks..
Central banks throughout the world are turning to or contemplating non-conventional measures or quantitative easing, such as asset purchases, to keep credit flowing as they run out of scope to lower benchmark interest rates any further.
UniCredit economist Marco Annunziata said the difference of views at the ECB meant that moulding and communicating a view on future policy options -- including following other central banks into direct asset purchases -- was a priority for the Governing Council.
"Attention will be firmly focused on whether the ECB has made any progress towards devising a quantitative easing strategy, and Trichet will need to clarify the extent to which the Governing Council agrees on the desirability and feasibility of such a strategy," he said in a note to clients.
Median expectations in the Reuters poll are for ECB rates to bottom at 1.0 percent in the second quarter as the economy contracts and inflation falls further below the ECB's medium-term goal of below, but close to 2 percent.
Euro zone producer prices dropped more than expected in December while consumer price inflation in the 16-nation region dropped to a 10-year low of 1.1 percent in January. Prices could even fall around the middle of the year, although policymakers have dismissed the odds of serious deflation. Meanwhile, economic sentiment is at a record low and unemployment is rising, with the bleak outlook dragging down the euro.
Economists found little cause for cheer in signs of stabilisation in the economic decline at the start of 2009. Purchasing Managers' Index figures showed that although the manufacturing and services sectors contracted for the eighth month in a row in January, the pace of decline slowed.
"The euro zone is still in the midst of a nasty recession," said Jennifer McKeown, economist at Capital Economics, of the services PMI. "President Trichet has taken the odd decision to rule out a rate cut this week so it's very unlikely he will go against that. But as it becomes clear that the recession is not going away and is getting worse, rates will have much further to fall, perhaps all the way to zero."