Nov. 5 (Bloomberg) -- The European Central Bank took its first step toward removing emergency stimulus measures designed to haul its economy out of recession, saying it won’t offer commercial banks 12-month loans next year.

“Not all our liquidity measures will be needed to the same extent as in the past” as the economy recovers, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today after the bank kept its benchmark interest rate at a record low of 1 percent. Markets don’t expect the ECB to prolong its offer of 12-month money beyond December and Trichet said he would “say nothing to dispel this present sentiment.”

Central banks around the world are starting to wind down some of the measures introduced to stave off a second Great Depression. The Bank of England said today it will slow the pace of bond purchases and the Federal Reserve yesterday outlined the conditions needed for it to raise interest rates.

The phasing out of long-term loans “is likely to be the first step in the ECB’s exit strategy,” said Colin Ellis, an economist at Daiwa Securities in London. “We think that the ECB will continue to be cautious and leave interest rates on hold for an extended period, and instead start withdrawing its monetary stimulus by winding down its liquidity operations.”

The euro rose as much as 0.4 percent to $1.4917 after Trichet’s comments. The yield on the benchmark 10-year German government bond rose 4 basis points to 3.36 percent.

Economic Recovery

The ECB has been giving banks as much cash as they want at its benchmark rate, for periods ranging from a week to a year, in an effort to get them lending to the broader economy again. The 16-nation euro region probably returned to growth in the third quarter, ending its worst recession since World War II.

Trichet indicated the ECB may raise its economic outlook when it publishes new forecasts in December. In September it predicted gross domestic product would shrink 4.1 percent in 2009 and grow 0.2 percent next year. The European Commission on Nov. 3 forecast the economy will expand 0.7 percent in 2010.

“A gentle exit of the non-standard measures doesn’t mean that rate hikes will follow automatically,” said Carsten Brzeski, senior economist at ING in Brussels. “The ECB’s economic outlook is still too somber and its inflation outlook too benign to call for any pre-emptive rate hikes.”

Consumer prices declined on an annual basis for a fifth month in October. Trichet said while inflation would return to positive territory “in coming months,” price pressures would remain subdued. The ECB aims to keep the inflation rate just below 2 percent on average.

Inflation Risk

Some policy makers are concerned that the ECB’s emergency lending to banks could fuel inflation once the economic recovery gathers steam.

“The Governing Council will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term,” Trichet said.

The ECB will offer banks unlimited funds for 12 months for the third time on Dec. 15. Banks drew 75 billion euros ($111 billion) at the last offering in September, down from 442 billion euros in the first tender in June. Trichet declined to say whether the ECB will raise the interest rate in the December tender.

The news that the ECB will discontinue its 12-month loans, one of its flagship policies this year, was flagged by German council member Axel Weber last week.

‘Differences’

“The fact Trichet ratified it shows it’s likely to happen, but I suspect Trichet might have preferred to wait until December to make a full assessment here,” said Julian Callow, Chief European economist at Barclays Capital in London.

Weber, who heads Germany’s Bundesbank, said on Oct. 29 that the ECB’s longer-term lending may not be maintained for as long as its short-term operations and commercial banks need to prepare for a “gradual withdrawal” of ECB liquidity.

Other policy makers have expressed concern that the economy remains fragile and may want more evidence of a recovery before committing to action.

“It’s very likely that there are larger differences of opinion in the Governing Council but I wouldn’t go as far as calling it tensions,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “Everybody is probably in favor of a gradual normalization, but there may be disagreement on the timing.”

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

Last Updated: November 5, 2009 11:35 EST