The European Central Bank said on Thursday it expected the euro zone recession to last for another year, unveiling details of a plan to pump cash into the troubled economy and keeping interest rates at a record low.

The ECB slashed forecasts for the 16-country economy this year and said growth would not return until mid-2010, while inflation would remain well below its 2 percent ceiling.

ECB staff predicted the euro zone economy would now shrink by up to 5.1 percent this year, compared with their previous worst-case scenario of a 3.2 percent decline. They signaled it would also struggle to grow in 2010 -- forecasting a change in GDP of between -1 percent and +0.4 percent.

The ECB held its main interest rate at a record low of 1 percent and President Jean-Claude Trichet said this was appropriate for now, in line with analysts' expectations that the ECB will keep rates on hold until the end of next year.

But he left open the option of further easing, as he did last month.

We did not decide it was the lowest level of interest rates that we would ever attain, whatever the circumstances, he said in an interview with Reuters television.

Downward revisions to the staff growth forecasts largely reflected the sharper-than-expected collapse at the end of 2008 and the start of 2009. Trichet said he expected the rate of decline to slow for the rest of 2009.

Inflation -- which is already at zero -- would remain negative for some months and the ECB saw prices growing again by the end of the year.

Interest rates are appropriate, but there's no boundary so it keeps the door open to lower rates in the event that we see a relapse in the forward looking indicators in the second half of the year, Lloyds analyst Kenneth Broux said.

There's no reason to expect any change in interest rates or to its covered bond program ... They are happy where they are and will stay for a while at 1 percent.

Goldman Sachs had expected the ECB to cut rates again next month, but Trichet's comments pushed them to the point of revision.

The press conference suggested that there is now a massive risk to our long held forecast of a rate cut of 25 basis points in July. We'll probably keep the forecast on for now to see how the April industrial production numbers look next week, one of the bank's top economists, Erik Nielsen, wrote in a note.


Unease is growing in some circles about the extraordinary measures taken by central banks around the world to shore up growth. German Chancellor Angela Merkel said earlier this week the ECB had bowed to international pressure in announcing plans to buy 60 billion euros ($85 billion) in covered bonds.

Trichet said he spoke to Merkel on the phone after her comments and made it clear the ECB took its decisions alone.

I told ... (Merkel) that we are fiercely independent, he said. I can tell you she confirmed to me she was fully respecting the independence of the ECB, fully backing what we were doing in full independence.

The ECB chief also denied the covered bond plan, aimed at increasing banks' ability to lend and lowering long-term borrowing costs, was comparable to programs announced by central banks like the U.S. Federal Reserve and the Bank of England.

We are not embarking on quantitative easing, he said.

Although he said he did not want to pre-judge future ECB decisions, Trichet left little room for any imminent increase in the size of the program, saying the decision was 60 billion euros full stop.

Details included spreading the purchases across the euro zone, buying bonds rated no lower than BBB- in both primary and secondary markets.

He said the ECB would unwind the steps it had taken quickly when the economy improved, but announced no specific plans to off-set the bond buys with steps to mop up liquidity.

Euro zone and British government bond futures hit a session low while euro interest rate futures extended falls after Trichet's initial statements.. The single currency moved up 0.2 percent against the dollar to $1.418 per euro.

The euro zone's economy shrank 4.8 percent in the first quarter of the year from the same period a year earlier and the ECB had been more cautious than some of its peers about whether there are signs the economy might be about to recover.

The Bank of England also decided to keep UK rates on hold on Thursday at 0.5 percent and the Bank of Canada left rates unchanged as well at 0.25 percent.

All but 2 of the 78 analysts polled by Reuters forecast the ECB's decision to hold rates at its monthly policy meeting.

(For poll, double click , for graph, click

Most analysts believe ECB rates have reached their lowest point and will stay there until at least the end of next year.

One in four economists polled saw further easing by September.

($1=.7050 Euro)

(Reporting by Sakari Suoninen; writing by Marc Jones and Krista Hughes; editing by David Stamp)