ECB cuts refi rate less than expected to 1.25 pct

The European Central Bank cut its main refinancing rate by 25 basis points to 1.25 percent on Thursday, disappointing analysts who had expected a larger cut.

The ECB cut rates of its overnight facilities also by 25 basis points. Overnight deposits at the central bank will pay 0.25 percent interest and funds borrowed from the marginal lending facility will attract an interest rate of 2.25 percent.

Economists had widely expected a cut of 50 basis points, and only 6 of 78 said in a Reuters poll they saw the ECB cutting rates by 25 basis points.

Financial markets were pricing in a 25 basis point rate cut, but this reflected more their expectation of how much the deposit rate would be lowered rather than the size of the refi rate reduction.

The ECB has lopped 300 basis points from benchmark credit costs since early October and ECB President Jean-Claude Trichet said in March he could not exclude further cuts.

Since then the euro zone economy has weakened further and inflation has dropped to a record low 0.6 percent in March — well below the ECB's target of below, but close to 2 percent — fuelling expectations of a larger cut in April.

Trichet will explain the Governing Council's decision at a news conference at 1230 GMT, where analysts will be looking for signs that the ECB will cut rates further at its May meeting.