* ECB cuts rates to record low 1.5 pct
* ECB staff say GDP may fall more than 3 pct this year
* Trichet says cannot rule out more rate easing
* Gives little away on additional measures to boost economy
(Updates with Weber comments, detail, Reuters poll)
By Marc Jones and Sakari Suoninen
FRANKFURT, March 5 (Reuters) - The European Central Bank cut interest rates to an all-time low on Thursday and signalled further easing was possible as its staff forecast the euro zone economy could shrink by more than three percent this year.
The ECB kept up its recent record pace of interest rate reductions, cutting by another 50 basis points to take its benchmark rate to 1.5 percent, the lowest in its 10-year history.
President Jean-Claude Trichet said he could not exclude further cuts, but refused to be pinned down on how soon the ECB could cut again or how low rates could go.
He said decision to cut rates was made by consensus -- suggesting rate setters were spilt on how much to cut rates by. He also gave scant new information on whether the bank was planning to employ additional economy-boosting measures such as bond-buying like other central banks.
Asked if interest rates were now as low as they were likely to go, Trichet said: "We did not decide ex ante that this was the lowest point that we could attain. Further decisions will depend on facts, figures... I don't exclude that the policy rate could be changed and could go down."
ECB policymaker and head of the Bundesbank, Axel Weber, also talked about lowering rates, telling German television that ECB still had scope to cut despite the latest move. [ID:nL5937738]
Interest-rate sensitive two-year bond yields tumbled to a
record low on Trichet's comments as markets bet on further cuts,
while the euro extended losses against the U.S. dollar, falling
below $1.25
Economists increased their bets that rates will soon be at 1 percent. A Reuters poll after the decision showed 58 of 66 economists expect another cut before mid-year, with most betting on a 50 basis point cut in April. (For poll please click [ECB/INT])
DIRE FORECASTS
The big surprise for economists was a dramatic downgrade of the ECB's economic forecasts as the bank's staff slashed both growth and inflation expectations by a far larger margin than had been expected.
Trichet stressed inflation was now expected to undershoot the ECB's price stability goal of below but close to 2 percent both this year and next.
"Inflation rates have decreased significantly and are now expected to remain well below two percent over 2009 and 2010," he told a news conference.
ECB staff predicted the recession-hit euro zone's economy could shrink by as much as 3.2 percent this year, more than three-times gloomier than its previous worst-case scenario and more pessimistic than most economists. [ECILT/EU]
"The bank dramatically revised down its GDP and inflation forecasts. This makes it very likely that the ECB will cut the refi rate to 1.0 percent," said Commerzbank Chief Economist Joerg Kraemer.
UniCredit's Aurelio Maccario was also surprised. "The press conference surprises a lot for its strikingly dovish tone ... At least, with words and figures, the ECB seems now fully acknowledging the seriousness of the crisis," he said.
NO MORE NON-STANDARD STEPS YET
The decision came shortly after the Bank of England also cut its interest rate to a new record low, of 0.5 percent, and said it would spend 75 billion pounds on assets to boost money supply in the hard-hit UK economy.
(For a graph of major central bank interest rates, please see: http://static.reuters.com/resources/assets/?d=20090305&t=2&i=FINANCIALRATES&w=&q=)
Quizzed repeatedly on the ECB's plans on asset purchases, Trichet said the ECB was still considering its options but gave little new information away. "I would only say that we are discussing and studying possible new non-standard measures," he said. "I don't exclude anything."
The Reuters poll showed analysts gave a 50 percent chance of the ECB conducting quantitative easing in coming months, up from 40 percent in a poll last week.
But he stressed the ECB was already in non-standard mode by flooding markets with liquidity. He said the bank would also renew its money market support and keep guarantees for unlimited funding, at a one-size-fits-all flat rate, in place for banks beyond the end of the year.
The generous liquidity supplies have pushed overnight
interest rates down below the ECB's main rate.
Trichet noted several times that the deposit rate -- now at 0.5 percent -- was "very, very low."
The ECB also revealed that euro zone central banks faced a potential hit of more than 10 billion euros after being left with hard-to-sell assets following defaults on loans by Lehman Brothers and other banks.
PROJECTIONS
New staff projections saw GDP contracting by 2.2 to 3.2 percent this year, compared with the previous estimate of -1.0 to 0.0 percent, giving a midpoint of a 2.7 percent fall.
The bloc's economy may grow again in 2010, it predicted, with staff forecasts ranging from a GDP drop of 0.7 percent to a rise of 0.7 percent next year, for a midpoint of zero. That was significantly lower than the 0.5-1.5 percent growth forecast made in December.
The current drop in inflation was "reflecting the severe downturn in economic activity", Trichet said. Inflation in the bloc was 1.2 percent in February, well under the ECB's target of below, but close to 2 percent.
Recent economic data had added "further evidence to our assessment that both global and euro area demand are likely to be weak in 2009. Over the course of 2010 (it) is expected to gradually recover", Trichet said.
Official data on Thursday confirmed the euro zone's economy suffered the worst quarter on record at the end of 2008. Other surveys have also shown confidence is at an all-time low, while the bloc shed more than quarter of a million jobs in January. (Additional writing by David Stamp; Editing by Toby Chopra)