FRANKFURT (Reuters) - The European Central Bank cut interest rates by 50 basis points yesterday as the euro zone economy faces its first recession, and forecast inflation should drop to its target next year.

President Jean-Claude Trichet said that turmoil on financial markets was likely to hit the global and euro zone economies, in comments suggesting that the ECB plans to cut interest rates further at some stage.

"I don't exclude that we could cut rates again," he told a news conference.

Yesterday's cut took the ECB's benchmark rate to a two-year low of 3.25 percent, reflecting the euro zone's sharply deteriorating economic outlook and easing inflation pressures.

Until last month ECB policymakers had been reluctant to cut rates due to inflation which soared over the summer to double the ECB's ceiling. But Trichet indicated this problem was fading fast.

"The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009," he said.

Euro zone inflation fell to 3.2 percent in October after peaking at four percent over the summer, far above the ECB's ceiling of two percent.