POLL-ECB final interest rate cut to 1.0% expected in May

LONDON, April 2 - The European Central Bank will make a final interest rate cut in May and move to unconventional measures to stimulate the economy after a smaller than expected reduction on Thursday, economists forecast in a Reuters poll.

The ECB cut rates by 25 basis points to a record low of 1.25 percent, disappointing the majority in the market who had forecast a 50 point move.

But investors were left in little doubt that the ECB will finish its rate cutting cycle next month after President Jean-Claude Trichet said the current level was not the lowest level it could hit.

Sixty-two of 66 economists said rates would be trimmed down to at least 1.0 percent next month, with 60 calling for a 25 basis point move and two saying 50 basis points. Four economists said the ECB would leave rates on hold next month.

Rates are then expected to stay at 1.0 percent until the end of the third quarter of 2010, according to the poll, which also gave a median 60 percent chance of the ECB soon adopting quantitative easing measures. That is up from 50 percent in a poll taken before the meeting.

Trichet said full details of further "non-standard" measures, as he likes to call them, to boost a fragile economy would be released at the ECB's May 7 meeting.

"We will see a cut in the refinancing rate of 25 basis points next month to 1.0 percent ... This may also be accompanied by other non-conventional measures too," said Rainer Guntermann at Dresdner Kleinwort.

However, he said the bank was more likely to extend the maturity on its refinancing operations and would not move into outright purchases of assets, as other major central banks in the U.S., UK and Japan are already undertaking.

The ECB's cause in nudging rates down was helped by a more than favourable inflation forecast. Trichet said inflation could turn negative by the middle of the year while it would remain below the ECB's ceiling of 2.0 percent in 2010.

Official euro zone inflation dropped to 0.6 percent in March and has already turned negative in Spain, hit hard by a recession that has swept across the bloc.

However, some economists forecast ECB rates will sink even further than the 1.0 percent that the majority now expects, saying a threat of deflation looms. Once that becomes apparent to the ECB it will be forced to cut rates further.

"Inflation expectations can come down further and unemployment is increasing massively. All that suggests that risks to inflation in the medium term on the downside are increasing," said Juergen Michels at Citi, justifying his call for the refi rate to bottom at 0.5 percent.

While the ECB's main refinancing rate looks like hitting a bottom in May, its deposit rate -- which was cut to 0.25 percent on Thursday -- appeared to be already at its lowest point, economists said.

Trichet acknowledged the euro zone economy was undergoing a severe downturn, but said that risks to GDP were balanced.

Survey and official data still paint a bleak picture of recession in the 16-nation bloc. GDP could contract as sharply in the first three months of the year as the 1.5 percent drop notched in the final quarter of 2008.