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European Central Bank President Jean- Claude Trichet signaled he’s reluctant to cut interest rates so low that policy makers are “trapped” with few options to respond to a deepening recession.

“We have to beware of being trapped at nominal levels that would be much too low,” Trichet said at a press conference in Brussels today. The ECB earlier lowered its benchmark by three quarters of a percentage point to 2.5 percent, the biggest cut in its ten-year history.

Trichet’s comment “suggests to us that the ECB will be unwilling to cut by that amount again any time soon,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London. “The ECB does not see scope for further deep cuts in rates along the lines of the Fed.”

Trichet wants to avoid the same problem facing Federal Reserve Chairman Ben S. Bernanke, who is being forced to draw up unorthodox tools after cutting its benchmark rate to 1 percent. The ECB has been more measured than other central banks in its policy response to the global recession. The Bank of England today cut its key rate by one percentage point to 2 percent and Sweden’s Riksbank lowered borrowing costs by the most since 1992.

Some of the ECB’s 21 policy makers have advocated a steady- hand approach to tackling the recession.

Council Split?

Luxembourg’s Yves Mersch told Luxembourg’s Tageblatt newspaper today that the bank is “entering calmer waters” with future rate changes more likely to be in the order of 25 basis points.

Executive Board member Lorenzo Bini Smaghi said on Oct. 31 that “the present crisis is partially due to interest rates that remained at low levels for too long.” On Nov. 25 he warned that “sharp” rate reductions “may contribute” to financial-market panic.

“The council is split between those wanting to cut rates by only 50 basis points and those who wanted a more aggressive 100 basis-point cut,” said Juergen Michels, chief European economist at Citigroup Inc. in London. “So 75 basis points was a compromise and policy makers can keep their powder dry until February.”

Trichet said today’s decision was reached by “consensus,” and declined to divulge if there were calls for smaller or bigger cuts online cash advance. He emphasized that the ECB has reduced rates by 1.75 percentage points since October after the financial-market crisis intensified, roiling stock markets and forcing governments to bail out banks.

Recession

New ECB forecasts published today show the euro-region economy will shrink about 0.5 percent next year, which would be its first full-year contraction since 1993.

Inflation will average about 1.4 percent in 2009 and 1.8 percent in 2010, the new projections show, meeting the ECB’s price-stability goal of keeping the rate just below 2 percent.

“European policy makers, as we’ve seen in past global crises, continue to underestimate both the degree of the problem and their own part in its creation and solution,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview. “I prayed that the ECB would do 100. At least they didn’t do 50.”

The 15-nation economy is already in recession and Trichet said the slump probably worsened in the fourth quarter.

Manufacturing and service industries contracted at the fastest pace on record in November and economic confidence plunged to a 15-year low. With oil prices collapsing, the inflation rate fell the most in almost 20 years last month, to 2.1 percent from 3.2 percent in October.

Recovery

While “global and euro-area demand are likely to be dampened for a protracted period of time,” lower commodity prices may support a gradual recovery from the second half of next year, Trichet said.

As well as cutting rates, the bank has flooded money markets with cash and widened its collateral rules to unfreeze credit markets. Trichet said today it may be possible for the ECB to purchase assets and securities outright, while declining to say if it would.

“If new decisions are needed we will take new decisions, but I can’t say anything else at this stage” he said. “We continue to look very carefully at the situation of the market and the situation of the economy.”

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