By Marc Jones and Anna Willard
FRANKFURT/PARIS, Jan 19 (Reuters) - European Central Bank policymakers again talked down the chance of euro zone interest rates getting close to zero on Monday, even as Brussels forecast the region's economy would slump almost 2 percent next year.
ECB Governing Council member George Provopoulos said the scope for further cuts to euro zone interest rates was limited and suggested markets may have gone too far in predicting ECB rates would fall to 1 percent in the coming months.
While there was still room to move on rates "if the markets should be expecting us to cut as far as 1 percent or even lower this is something different," Greek central bank chief Provopoulos said in an interview with news agency Bloomberg.
"We have given no such indication. The scope for further cuts will be limited," he said.
The ECB has carried out its most aggressive series of rate cuts ever in the last four months. It cut benchmark credit costs another 50 basis points to 2 percent last week, bringing them level with an all-time low.
With the recession continuing to deepen, analysts expect another 50 basis point cut in March, according to the latest Reuters poll [ECB/INT], and the majority expect rates to bottom out at 1 percent later this year.
Provopoulos and Austrian counterpart Ewald Nowotny also joined ECB President Jean-Claude Trichet in saying they saw no prospect of zero interest rates in the 16-nation region, despite a worsening economic outlook.
"The ECB has no interest in interest rates going down to zero," Nowotny told local broadcaster ORF in a radio interview, conducted last week but broadcast on Monday.
DOWNGRADES
The European Commission cut its forecasts for the euro zone further on Monday, predicting its economy would shrink almost 2 percent this year, almost double the ECB's worst case scenario, and said it expected a bumpy road ahead for would-be euro nations like Poland and the Czech Republic. [ID:nLJ612890]
Standard & Poors also followed up its recent downgrade of Greece by cutting Spain's credit rating to AA+ from AAA as the sharp downturn hammers the once booming, construction-led economy, weakening budget revenues. [ID:nLJ632098]
Investors now fear that a slump in growth will lead Portugal and Ireland to suffer the same fate after the pair received S&P warnings last week.
The Commission forecast Greek economic growth to fall to near zero this year and said its government deficit would top Brussels' limit for a third straight year. [ID:nLJ618115].
Provopoulos said he could not exclude downward revisions to the ECB staff's recent economic forecasts that the euro zone would shrink by as much as 1 percent in 2009, adding that he expected the euro-area economy to begin to recover around the end of the year or in early 2010.
Speaking in Paris, Trichet said policymakers expected the forecasts to be revised down "substantially," when they are released in March.
"After an exceptionally difficult 2009, to consider 2010 as the year of recovery seems to me like a good working hypothesis," he said.
NO ZERO RATES SEEN
"I'm not excluding further (rate) reductions if inflation prospects warrant such reductions," Provopoulos said. "I should caution in the sense that some people interpret this as interest rates going close to zero, which is not true in our case."
Rates were "already at very low levels," he said, implying that "at some point in the future moves take place in small steps."
The comments echo Trichet's from last week, when he warned that the ECB must avoid getting caught in a so-called 'liquidity trap', which he defined as "very, very low interest rates".
Economists see a liquidity trap as a combination of very low official rates, a high propensity to save, and a reluctance to lend meaning central bank monetary policy loses its traction.
From Jan. 21, the ECB also will cut the rate it pays on overnight deposits to 1 percent as it tries to make sure the 225 basis points of rate cuts since last October are passed on to the real economy and that banks lend on any excess liquidity to others rather than depositing it overnight at the ECB. [ID:FAT004535]
Nowotny said in deciding to cut the deposit rate, the ECB had carried out a detailed study on why the money market was only just slowly getting underway.
"Confidence was only one thing and actually not even the largest aspect," he said.
"The most important aspect was that the banks certainly want to be on the safer side for their own liquidity needs. Liquidity is the most sensitive point at the moment."
(Additional reporting by Krista Hughes in Frankfurt, Angeliki Koutantou and George Georgiopoulos in Athens, Andrew Hay in Madrid and Marcin Grajewski in Brussels)