FRANKFURT - The European Central Bank, which recently cut its interest rates to all-time lows, finds itself in the spotlight at its final meeting of the year Thursday to disperse the spectre of deflation.

The ECB took financial markets by surprise last month and pared back its central “refi” refinancing rate by a quarter of a percentage point to a record low of 0.25 percent. The trigger for the move was an unexpectedly sharp slowdown in area-wide inflation to just 0.7 percent in October.

In November, the inflation rate increased fractionally to 0.9 percent.

But analysts believe that that does not sound the all-clear and the ECB cannot simply sit back and do nothing.

“The cut in rates has not markedly relieved the pressure on the central bank to take additional action to support what remains a very fragile economic recovery and head off deflation,” said Capital Economics economist Jonathan Loynes. Marie Diron at EY Eurozone Forecast agreed.

“We think that the ECB needs to recognise the risk of deflation more clearly and act pre-emptively,” she said.

ECB officials have been keen to stress that they believe what the eurozone is currently experiencing is “disinflation” not “deflation”.  Disinflation describes slowing price rises which remain in positive territory but reflect a stagnating economy in which growth and jobs are elusive.

By comparison, deflation is where prices fall in real terms, which encourages consumers to put off buying goods in the expectation that if they wait, they will get them cheaper.

That dampens demand, adding to the downward pressure in the economy as companies hold back investment, in turn impacting jobs and demand in a vicious circle seen at its worst in the 1930’s Great Depression.