–Focus Turns To Draghi Press Conference Starting at 12:30 GMT

FRANKFURT (MNI) – The European Central Bank’s Governing Council
decided at its monthly monetary policy meeting Thursday to leave its key
refinancing rate unchanged at 0.75%.

The decision to leave borrowing costs unchanged at their historic
low after last month’s 25-basis-point cut left few observers surprised.

Public statements by Council members have been fewer and farther
between lately with the advent of summer holidays. Those who have spoken
left the door open to yet another reduction in interest rates in view of
continued weak economic data, but without encouraging such expectations
and in particular without suggesting the ECB already wished to move
again in August.

Council member Ewald Nowotny observed last week that “a central
bank has a number of other alternatives to influence money markets in
addition to interest rates.”

Various officials have also pointed to likely favorable inflation
developments ahead, which would allow the Council to consider a further
rate cut in the coming months.

Observers’ expectations have therefore tended to focus on possible
non-standard measures ECB President Mario Draghi might announce at the
press conference.

Draghi himself fueled much speculation when he declared last week
that “within our mandate the ECB is ready to do whatever it takes to
preserve the euro. Believe me, it will be enough.” He added: “To the
extent that the size of the sovereign premia hamper the functioning of
the monetary policy transmission channels, they come within our
mandate.”

According to German daily Sueddeutsche Zeitung today, Draghi is
planning a concerted action by the ECB and Europe’s future permanent
bailout fund ESM to reduce the high bond yields Italy and Spain face.

Under this plan, the ESM would buy a smaller amount of Spanish and
Italian bonds on the primary market while the ECB would purchase bonds
on the secondary market, the paper wrote.

Interest rates thus appeared to occupy the back burner of market
attention in the run-up to today’s rate announcement. Indeed, as of this
morning, one widely used market measure of rate cut expectations, the
Eonia, was showing only an 11.2% chance of a 25-bps cut, suggesting that
hardly anyone expected a move.

Still, it must be noted that a high degree of dysfunction in money
markets have made Eonia and other measures less reliable indicators of
rate expectations than they once were.

In more normal times, the ECB’s refi – or minimum bid – rate would
be the lowest rate at which banks could seek ECB financing in
competitive bidding at the bank’s main weekly refinancing operations.
For now and until further notice, it is the rate at which those
refinancing agreements are fixed for all bidders.

The ECB today also left unchanged its deposit rate, which is the
floor for euro money market rates, and the marginal lending rate, which
is the ceiling. Following July’s decision to cut them both by 25 bps,
the deposit rate is now at 0% and the marginal lending rate at 1.50%.

This leaves the so-called corridor – the difference between the
floor and ceiling rates – at 150 bps. At some point the ECB may restore
the corridor to the 200-bps margin it had been at until October 2008,
but this seems to have low priority.

The next policy-making Governing Council meeting is scheduled for
September 6.

–Frankfurt bureau tel: +49-69-720-142. Email: dbarwick@marketnews.com

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