March 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet indicated officials will cut the benchmark interest rate further after reducing it to a record low of 1.5 percent today to combat a worsening recession.

“We didn’t decide ex-ante that this was the lowest point that we could attain,” Trichet said during a press conference in Frankfurt after the ECB lowered its main rate by half a percentage point. Policy makers still haven’t decided on using additional policy tools to stimulate growth, Trichet said.

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. Trichet said today the central bank has cut its economic forecasts again and expects inflation to stay “well below” its 2 percent ceiling this year and next.

“The ECB will continue to lower interest rates as much as possible,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “By spring or early summer we’ll be at 1 percent.”

The euro fell as much as 0.6 percent to $1.2481 after Trichet’s comments. The yield on the 10-year German bund, Europe’s benchmark government security, fell 11 basis points to 3.03 percent by 3:35 p.m. in London.

Slumping Economy

The euro-region economy will contract about 2.7 percent this year and stagnate in 2010, according to the ECB’s new forecasts published today. The central bank expects inflation to average about 0.4 percent in 2009 and 1 percent next year, the projections show.

“There’s clearly room for more rate cuts, there’s no doubt about that,” said Laurent Bilke, an economist at Nomura International in London. “The ECB is likely to cut rates again, but maybe not as low as the Bank of England.”

Bank of England Governor Mervyn King today cut the key rate to 0.5 percent, the lowest since the bank was founded in 1694, and said he will take the unprecedented step of printing money to buy assets. The Fed, which has reduced its benchmark rate to close to zero, is buying commercial paper to ease the credit crunch and boost economic growth.

Trichet said while the ECB is examining “non-standard measures,” no decisions have been taken on their use. Council member Axel Weber said the bank would only look at using new policy tools if deflation became a real risk in the euro region. “I don’t see that at the moment,” he said.

Cost of Delay

Instead Trichet announced today that the ECB will extend “for as long as needed and in any case beyond the end of 2009” its policy of offering banks as much money as they want in its refinancing operations.

“The longer that the ECB delays in agreeing their next steps in tackling the crisis, the greater the eventual cost to the euro-zone economy,” said Paul Niven, head of asset allocation at F&C Investments in London, which oversees $200 billion.

Trichet entered 2009 signaling a reluctance to keep cutting rates for fear of feeding future asset bubbles and inflation. Those qualms remain. “We see a number of drawbacks associated with a zero-rate level,” Trichet said today.

Still, the ECB has lowered its main rate by a total of 275 basis points since early October.

“The ECB seems now to be fully acknowledging the seriousness of the crisis and its nasty impact on the euro area’s economic perspectives.” said Aurelio Maccario, chief euro area economist at UniCredit MIB in Milan. “A more aware and ready-to- act ECB is today’s good news.”

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

Last Updated: March 5, 2009 12:13 EST