March 5 (Bloomberg) -- The European Central Bank cut interest rates to a record low in an attempt to stem the worst recession since World War II.

Officials meeting in Frankfurt reduced the benchmark lending rate by half a percentage point to 1.5 percent, as forecast by all 55 economists in a Bloomberg News survey. That’s the lowest since the ECB took control of monetary policy in 1999. The bank may wait until May to cut rates further, another survey of economists shows.

The economy of the 16 euro nations is shrinking faster than the ECB expected just three months ago as the global slowdown curbs export demand and companies lay off workers. ECB President Jean-Claude Trichet has been reluctant to follow the Federal Reserve and the Bank of England, which have cut rates toward zero and started using other policy tools, for fear that will sow the seeds of future crises.

The ECB has “misjudged the severity of the economic downturn,” said Julian Callow, chief European economist at Barclays Capital in London. “The monetary policy stance of the ECB is delaying the recovery. We’re looking at 2012 to fully make up for the contraction of the economy.”

Trichet holds a press conference at 2:30 p.m. to explain today’s decision. Separately, the Bank of England cut its key rate by half a point to 0.5 percent, the lowest since the bank was founded in 1694, and said it will start printing money to buy assets.

Slumping Economy

The euro-region economy shrank 1.5 percent last quarter and latest data suggest the recession is deepening. Manufacturing contracted at a record pace last month, confidence is at an all- time low, unemployment is climbing toward 10 percent and inflation, at 1.1 percent, is the weakest since 1999.

BASF SE, the world’s largest chemicals company, on Feb. 26 reported its first quarterly loss in seven years and said it will accelerate plant closures and eliminate at least 1,500 jobs. Air France-KLM Group, the euro region’s biggest airline, and Volkswagen AG, its largest carmaker, are also shedding staff.

The ECB will slash its growth and inflation forecasts today, said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan. He expects the bank to predict the economy will shrink about 2.2 percent this year. In December it forecast a 0.5 percent contraction.

‘Extraordinary Measures’

“They need to go down with rates but that won’t be enough,” Maccario said. “They need to start thinking about extraordinary measures to help get credit flowing.”

The Fed is already buying commercial paper to ease the credit crunch and the Bank of England said today it will start buying U.K. government bonds to increase money supply, a policy known as quantitative easing.

ECB council member Athanasios Orphanides has argued the bank could adopt similar measures to boost its economy, challenging Trichet’s view that they have “drawbacks” and should be avoided.

Council members Axel Weber and Christian Noyer said this week that the ECB is examining all its options, including the purchase of commercial paper. “We’ve not reached a conclusion,” Weber said.

The ECB is “not ready yet to present concrete plans,” said Rainer Sartoris, an economist at HSBC Trinkaus & Burkhardt in Dusseldorf, Germany. “First of all, they’ll use up their potential to cut rates.”

Economists in the Bloomberg survey expect the ECB to lower its benchmark rate to 1 percent in May, the level that Weber said on Feb. 24 is his “lowest limit.”

Policy makers remain concerned that cutting rates too low may fuel future asset-price bubbles and inflation. Those worries will be increasingly overtaken by the depth of the economic slump, said Glenn Marci, an economist at DZ Bank AG in Frankfurt.

“The ECB is probably wishing they were back in the times when they only had to fight inflation,” he said. “But they’ll need to focus on economic growth as bad incoming data keeps pushing back a recovery.”

To contact the reporter on this story: Jana Randow in Frankfurt jrandow@bloomberg.net.

Last Updated: March 5, 2009 07:47 EST