As widely expected, the European Central Bank cut its main policy rate by 50 bps at its meeting this week. The two-week repo rate now stands at 2.00 percent, matching the low set in 2003-04. As we discuss below, we believe the ECB will need to ease policy even further.

In explaining the decision to cut rates in the post-meeting press conference, ECB President Trichet referenced the significant slowdown that is underway in the Euro-zone. Downturn would probably be a better word to describe what is transpiring at present in the Euro-zone economy. As shown in the top chart on page 4, the purchasing managers' indices for the manufacturing and service sectors have plunged into deep recession territory over the past few months. Indeed, hard data from November confirm just how weak the Euro-zone economy is at present.