April 10 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled he's still not ready to cut interest rates even as the credit squeeze poses a greater threat to economic growth than policy makers anticipated.

``We are experiencing a rather protracted period of temporarily high annual rates of inflation,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate at 4 percent. While financial-market tension may have ``a broader than currently expected impact on the real economy,'' ensuring price stability is ``very serious for us,'' he said.

The Bank of England lowered its benchmark rate a quarter- point today and the Federal Reserve has slashed rates after the U.S. housing slump pushed up the cost of credit worldwide. With euro-region inflation running at the fastest pace in almost 16 years, the ECB is reluctant to follow suit.

``We believe that the current monetary policy stance will contribute'' to bringing inflation under control, Trichet said. ``The firm anchoring of medium- to longer-term inflation expectations is of the highest priority.''

The euro dropped against the dollar, falling from a record $1.5913 before Trichet spoke to $1.5727 at 6.45 p.m. in Frankfurt. European government notes advanced.

`Easy to Criticize'

The Fed has reduced its key rate by 3 percentage points since September to 2.25 percent, and the Bank of England today cut its benchmark for a third time since December to 5 percent. By contrast, South Africa and Iceland raised interest rates after inflation accelerated.

``It's easy to criticize the ECB when compared with the Fed as it seems the ECB is less dynamic,'' Antonio Zamora, an economist at Banco Urquijo in Madrid, said in a Bloomberg Television interview. ``The truth is that the economic situation of the two regions is very different.''

The International Monetary Fund predicts euro-region growth will outpace the U.S. for a third year in 2009, giving Trichet more scope to fight inflation than Fed Chairman Ben S. Bernanke. The IMF yesterday forecast economic expansion of just 0.6 percent in the U.S. next year compared with 1.2 percent in Europe.

While Trichet acknowledged an ``unusually high'' level of uncertainty, he said ``the economic fundamentals of the euro area are sound.''

German and French industrial production unexpectedly rose for a third month in February and business confidence increased in March in both countries, which account for about half the euro- region economy.

Great Depression

Still, the IMF said there's a 25 percent chance of a world recession, with losses stemming from the worst financial crisis in the U.S. ``since the Great Depression'' estimated to approach $1 trillion. Banks and securities firms so far have posted $232 billion in asset writedowns and credit losses.

The difference between the rate banks charge for three-month euro loans relative to the overnight indexed swap rate, an indicator of the availability of cash in Europe, has increased to the most since December. The so-called Libor-OIS spread was at 74 basis points today. It averaged 6 basis points in the first half of 2007.

``Even with the ECB rate unchanged, for the real economy, for banks, for borrowers, for households, for companies, interest rates are rising,'' said Laurent Bilke, an economist at Lehman Brothers Holdings Inc. in London who used to work as a forecaster at the ECB. ``The most reasonable scenario is that inflation will slow a bit after the summer, so we think the next cut will be in September.''

`Ice and Fire'

The IMF said yesterday European inflation will slow to 1.9 percent next year. The ECB, which aims to keep inflation below 2 percent, ``can afford some easing'' of interest rates, the fund said.

Investors have nevertheless reduced bets on lower ECB rates this year, futures trading shows. The implied rate on the Euribor futures contract maturing in December was at 4.12 percent today, up from 3.31 percent on Feb. 11.

Consumer prices in the euro region rose 3.5 percent in March from a year earlier, the biggest increase since June 1992.

The ECB in March raised its forecast for 2008 inflation to about 2.9 percent. While Trichet today predicted inflation will drop below 2 percent in 18 months, he said risks ``remain clearly on the upside,'' including soaring energy and food costs and ``bigger-than-expected wage growth.''

In Germany, Europe's largest economy, public-service workers on March 21 won a pay increase that the Ver.di union said is worth 8.9 percent over two years. On Feb. 20, the IG Metall union secured a 5.2 percent raise for 85,000 steelworkers.

``The world is caught between ice and fire -- slower growth and inflation,'' Dominique Strauss-Kahn, managing director of the IMF, said today. ``Inflation is back.''

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net

Last Updated: April 10, 2008 13:11 EDT