European Central Bank cuts its key interest rate

AP Business WriterFRANKFURT, Germany (AP) -- The European Central Bank cut its main interest rate by a half percentage point Thursday, making only its fourth cut this year amid mounting signs of a deepening economic slowdown.

The cut took the ECB's main refinancing rate to 3.25 percent. The decision by the bank's 18-member policy council to cut was widely expected, although most economists had predicted only a quarter-point cut.

Despite calls from some European government officials to cut rates more quickly, the bank had maintained a cautious approach since making a half-point cut Sept. 17 in coordination with the Federal Reserve. Bank President Wim Duisenberg had said the ECB wanted to see more hard data on how badly the Sept. 11 terror attacks on the United States hurt growth before deciding whether to cut rates again.

The ECB's caution has contrasted with the approach of the Federal Reserve, whose latest half-point cut Tuesday reduced its federal funds rate to 2 percent. The Fed has made 10 cuts this year.

Earlier Thursday, the Bank of England also slashed its key lending rate by half a percentage point, to 4 percent.

Some economists said the ECB risked undermining the euro if it didn't cut rates Thursday. The common currency has failed to sustain a rally against the dollar, a sign that investors are wary of growth prospects in the 12-nation euro zone.

One reason behind the ECB's reluctance to cut rates is its stated emphasis on fighting inflation. While rate cuts can spur growth by making it cheaper for businesses to borrow and spend, they also risk causing more inflation by increasing the supply of money.

Inflation in the euro zone has been creeping down, standing at 2.5 percent in September. Duisenberg has said he expects it to hit the bank's goal of 2 percent or less early next year.