April 2 (Bloomberg) -- The European Central Bank cut interest rates less than economists forecast and deferred a decision on what other tools it can use to rescue its ailing economy, suggesting a split on the bank’s Governing Council.

The Frankfurt-based ECB lowered its benchmark rate by a quarter-point to 1.25 percent, less than the half-point reduction expected by 49 of 55 economists in a Bloomberg survey. President Jean-Claude Trichet indicated the bank may lower the rate further next month, when he said it will also decide on any new “non-standard measures.”

“There was almost certainly a split,” said Nick Kounis, an economist at Fortis Bank in Amsterdam and a former U.K. Treasury official. “They can’t decide on what to do next so they’re buying time.”

The ECB is lagging counterparts such as the U.S. Federal Reserve, the Bank of England and the Bank of Japan, which have cut their key rates to almost zero and are pumping money into their economies by buying government and company securities. While Vice President Lucas Papademos has said the ECB could purchase corporate debt, council members Juergen Stark and Axel Weber have signaled they’re opposed to such a move.

The euro rose more than a cent against the dollar after the ECB’s smaller-than-expected move, climbing as high as $1.3493.

G20 Leaders Meet

Today’s decision came as leaders from the Group of 20 nations met in London to discuss ways to stem the global recession. The euro-region economy may shrink as much as 4.1 percent this year, faster than the ECB expects, according to the Organization for Economic Cooperation and Development.

The ECB has now reduced interest rates by 3 percentage points since early October. At 1.25 percent, the main rate is the lowest since the ECB took charge of monetary policy in 1999.

Trichet said the key rate may be reduced further “in a very measured way.” The deposit rate, which the ECB cut to 0.25 percent, is at “an extremely low level” and has probably reached its floor, he said. The ECB is allowing the deposit rate -- the rate it pays banks on overnight deposits -- to steer short-term market borrowing costs.

“It is certainly reasonable to think that some council members want to slow down and allow some time to assess the impact of the easing already implemented, while others think that there is still a lot of work to do,” said David Mackie, an economist at JPMorgan Chase in London.

Speculation

In the past month, four ECB policy makers suggested offering banks longer-term loans to ease credit strains. The ECB currently lends banks as much cash as they need for periods of up to six months.

Papademos last week stoked speculation the ECB could also soon announce plans to buy corporate debt, when he said March 26 that such a step may be “warranted” to “enhance liquidity.”

When pressed by reporters at today’s press conference, Papademos said “there was no intention to prepare the market” for any non-standard measures.

“Our interpretation of this is that the council has still not yet made up its mind on what new non-standard measures it would take,” said Julian Callow, an economist at Barclays Capital in London. “But Trichet did appear to suggest that the mood on the Governing Council was not to follow the Fed and Bank of England in printing money via an aggressive asset-purchase program.”

Trichet said the bank is looking at “optimizing what could be done and should be done to enhance credit support.”

Economists said the ECB would have to signal it has finished cutting rates if it decides to offer banks longer-term loans, as banks won’t be tempted to borrow if they think rates will drop further.

“The bank would prefer to see the refi rate at or near a floor before proceeding with non-standard measures,” said Kenneth Broux, an economist at Lloyds TSB in London. “This would imply that the next decrease in the refi rate is almost inevitable in May.”

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

Last Updated: April 2, 2009 11:16 EDT