June 2 (Bloomberg) -- The European Central Bank may reduce its benchmark interest rate for the third time in seven months this week as the economy stagnates and the euro's advance slows inflation, economists said.

The ECB may cut its rate by half a percentage point to 2 percent when policy makers meet in Frankfurt on Thursday, according to a majority of the 32 economists surveyed by Bloomberg News. The Bank of England may keep its rate at 3.75 percent, a separate survey of 38 economists showed.

``The pressure on the ECB is immense,'' said Ralph Wiechers, chief economist at Germany's VDMA engineering association, which represents 3,000 companies including Siemens AG. ``Lowering rates is the only way to slow the euro's appreciation, at least for a while.''

French President Jacques Chirac and German Finance Minister Hans Eichel are among politicians who have called on the ECB to trim borrowing costs. The euro region's economy didn't grow at all in the first quarter. The currency's 26 percent increase against the dollar in the past 12 months is eroding demand for exports as well as helping to curb inflation.

European manufacturing may have contracted for a third month in May, a survey of executives for Reuters Group Plc may show today, economists said. The survey of purchasing managers at about 2,500 companies will be released at 9 a.m. in London.

The ECB has reduced rates six times since the start of 2001, half as many times as the U.S. Federal Reserve, whose overnight lending rate is 1.25 percent, the lowest since 1961. A further reduction in European rates would mean borrowing costs are the lowest in any of the dozen euro nations since at least 1948.

Issing, Papademos Signal Cut

Otmar Issing, the ECB's chief economist, and Lucas Papademos, its vice president, are among central bankers who have signalled a cut is in the cards. Papademos said on May 26 that inflation will be ``clearly below'' the ECB's 2 percent target next year. Issing said the next day that the euro's gain allows for ``maneuverability'' in rate discussions.

``Clearly, we'll get a cut,'' said Julian Callow, an economist at Credit Suisse First Boston in London. ``It's just a question of the magnitude.''

Callow, whose team was last year rated first by its peers in a Thomson Financial survey of analysts, is among 20 economists to predict a half point-reduction. Twelve forecast a cut of a quarter point.

Investors expect at least a quarter point cut by the ECB on Thursday, futures trading indicates. The yield on the three-month Euribor contract maturing in June was 2.18 percent on Friday. The ECB's rate is 2.5 percent.

Inflation in the dozen euro countries probably slowed to 1.9 percent in May, from 2.1 percent in April, analysts said. That would be the first time in almost a year that it drops below the ECB's 2 percent limit. The European Union statistics office will publish the figures at noon today in Brussels.

Bank of England

At the same time, the euro's strength is making it hard for some Bank of England policy makers to support a rate cut in the U.K. Inflation has exceeded the British central bank's goal of 2.5 percent for six months.

The Bank of England's monetary policy committee voted 5-4 to keep its rate at 3.75 percent last month. Most would vote for a cut in the event, the pound halted its 9 percent slide against the euro this year, minutes of he meeting showed.

``It's not clear that anything has happened to change their minds,'' said Ben Broadbent, an economist at Goldman Sachs Group Inc. in London. ``Sterling's still weak, the stock market has risen and consumer confidence is slightly improved.''

U.K. policy makers have reduced their benchmark rate eight times since the start of 2001, most recently in February, to the lowest level in 48 years.

European Exports Suffer

The German, Italian and Dutch economies shrank in the first quarter. Companies from Volkswagen AG to Siemens AG have said the euro's gain is hurting profitability. New orders to the German machinery industry fell in April, led by a drop in exports, a report Friday showed.

The trade surplus of the 12-nation euro region fell to 1.6 billion euros in March from 11 billion euros a year earlier, the European Union statistics office said last month. In February the surplus was 5.2 billion euros.

Growth in the region this year will fall short of the ECB's forecast of 1 percent, Bank of Italy Governor Antonio Fazio said in a speech on Saturday. Fazio, one of 18 ECB policy makers, said inflation is ``low'' and added the euro's advance is hurting exports.

Last Updated: June 1, 2003 19:01 EDT