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By Paul Carrel
FRANKFURT, Nov 6 (Reuters) - The European Central Bank is expected to slash interest rates by 50 basis points or more later on Thursday, hoping to breathe life into the euro zone economy as it faces its first recession.
ECB President Jean-Claude Trichet has already said a second cut in just under a month is a possibility at the Governing Council's policy meeting. Analysts are sure the Council won't hold back, and are waiting for Trichet to give any indication that it might take further action next month as well.
All 81 economists polled by Reuters last week expect the ECB to cut rates by 50 basis points to a two-year low of 3.25 percent on Thursday, and some people in the market expect more.
"Seventy-five (basis points) is possible. But it is much more likely that it will be 50," said Holger Schmieding, co-head of Europe economics at Bank of America. He put the likelihood of a 75 basis point cut at 10 percent.
However, figures derived from Euro Overnight Index Average (EONIA) rates showed interest rate traders almost fully pricing in a 75 bps cut to 3.0 percent.
ECB policymakers started their meeting in Frankfurt at 0800 GMT against a bleak economic backdrop. The European Commission said on Monday that the euro zone is already in a technical recession and predicted economic growth will come to a virtual standstill next year.
The European Commission said on Monday that the euro zone is already in a technical recession and predicted growth will come to a virtual standstill next year.
Data showing bigger-than-expected job losses in the United States, a sharp contraction in the world services sector and steep house price declines and a manufacturing retreat in Britain all underscored the global gloom.
The euro zone's economy, which had grown steadily since the bloc's creation in 1999, contracted by 0.2 percent in the second quarter this year and most economists expect further shrinkage in third quarter GDP figures on Nov. 14.
"We are probably facing a recession lasting three quarters of a year," Schmieding said.
The ECB will announce its decision on rates at 1245 GMT, and Trichet will explain the reasons at a news conference at 1330 GMT.
"HOLDING OUR BREATH"
Business confidence in Europe's major economies is at record lows due to the recent intensification of the financial crisis and as it suffers the hangover of record inflation and a jump in the strength of the euro over the summer.
Politicians in the 15-country euro zone are on tenterhooks, hoping a hefty rate cut from the ECB will stave off the recession or at least help to keep it short, and the impact on unemployment limited.
France, the euro zone's second largest economy after Germany, faces "a context of quasi-recession", Prime Minister Francois Fillon said in an interview broadcast on Monday.
"We are holding our breath ... We could see some changes, improvements regarding interest rates in the coming days," French Economy Minister Christine Lagarde said on Tuesday.
A 50 basis point move would repeat the emergency cut the ECB made on Oct. 8 in tandem with six other central banks, including the U.S. Federal Reserve and the Bank of England.
The Fed and the Bank of Japan cut rates last week and the BoE is tipped to cut on Thursday too.
Economists in the Reuters poll expect the ECB to keep cutting as the economy slows and inflation risks evaporate. The median expectation is for the main refi rate to hit 2.5 percent in mid-2009.
"Provided that they cut by 50 basis points, the press conference will surely send a message of likely further cuts," Goldman Sachs economist Erik Nielsen said in a research note.
The ECB faces fewer problems in reaching its goal of annual inflation just below 2 percent than it did as recently as the summer, when rising food and fuel prices pushed the rate to a peak of 4 percent. Inflation fell to 3.2 percent in October, according to Eurostat's flash estimate, and economists expect it to slow sharply next year.
ECB Executive Board member Juergen Stark was quoted on Wednesday as saying economic growth would be very weak well into 2009 and oil price fluctuations could push inflation briefly below zero. But he saw no threat of a deflation spiral which would further damage the real economy.
The ECB would use all instruments at its disposal, including interest rates, to tackle the situation, he said.
(Writing by Paul Carrel; editing by David Stamp)