July 2 (Bloomberg) -- Jean-Claude Trichet signaled the European Central Bank will keep interest rates at a record low for the coming months as officials deploy new tools to fight the worst recession since World War II.

“The current rates are appropriate,” Trichet said at a press conference in Luxembourg after the ECB left its benchmark rate at a record low of 1 percent. At the same time, he refused to rule out the option of further cuts, saying “we did not decide today that this was the lowest level we would attain under any circumstances.”

The ECB has reduced its main rate by 325 basis points since October to stem the economic slump. The Frankfurt-based central bank also flooded the banking system with hundreds of billions of euros last week and will start buying 60 billion euros ($84 billion) of covered bonds on July 6 to free credit and encourage lending.

“The ECB appears currently to be firmly in ‘wait and see’ mode,” said Howard Archer, chief European economist at IHS Global Insight in London. “The ECB clearly believes that it can afford to stand back in the near term at least and monitor what impact its various policy moves are having.”

The ECB may keep its benchmark rate at the current level until the fourth quarter of 2010, a Bloomberg survey of economist showed before the meeting. Trichet, who traditionally uses the word “appropriate” to signal there’s no imminent plan to change rates, said today’s decision by the 22-member Governing Council was unanimous.

The euro was little changed after Trichet’s comments and traded at $1.4020 at 4:43 p.m. in Luxembourg.

Worst Over?

There are signs that the worst of the recession may be over. The contraction in Europe’s services and manufacturing industries is slowing and confidence in the economic outlook rose to a seven-month high in June.

“Activity is likely to remain weak but should decline less strongly than was the case in the first quarter,” Trichet said. “Looking ahead into next year, after a phase of stabilization, a phase of recovery is expected around mid-2010.”

Still, loans to households and companies in the euro area grew at the slowest pace on record in May as the recession crimped demand for debt and prompted banks to tighten credit standards.

The ECB predicts the euro-area economy will contract about 4.6 percent this year and 0.3 percent in next year. Unemployment will rise to 11.5 percent in 2010, the European Commission forecast on May 4. The jobless rate was 9.5 percent in May.

Future Cut

“The ECB could eventually cut again if renewed economic weakness and/or signs of deflation were to materialize,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London, who expects the central bank to leave the benchmark at 1 percent over the next six months.

The ECB is “happy” with the result of the bank’s first 12-month liquidity-providing operation, which supplied banks with a “significant amount” of money, Trichet said. “This operation at a fixed interest rate is expected to strengthen further the liquidity of banks and to support money markets.”

A “continuation of the ECB’s laissez-faire attitude towards money markets means low rates for longer,” said Christoph Rieger, co-head of fixed income strategy in Frankfurt at Commerzbank AG.

Trichet reiterated that he’s aware of the need for a swift exit from the stimulus being provided by central banks and governments once growth returns to head off inflation risks.

Unwind

“The Governing Council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed,” he said. “What we’ve been doing has been designed to permit an easy exit strategy” and “any threat to price stability over the medium to longer term can be effectively countered in a timely fashion.”

For now, Trichet said he expects inflation pressures to remain muted. Consumer prices fell 0.1 percent in June from a year earlier, the lowest inflation rate Europe has seen since 1953, according to Royal Bank of Scotland.

“The fall of annual inflation rates reflects mainly temporary effects,” Trichet said. “After a return to positive rates, we expect price developments to remain dampened over the horizon.”

To contact the reporters on this story: Jana Randow in Frankfurt jrandow@bloomberg.net; Gabi Thesing in Frankfurt gthesing@bloomberg.net.

Last Updated: July 2, 2009 11:02 EDT