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

KRANJ, Slovenia (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 for a third month in a row after July’s 25-basis-point cut
corresponded to the expectations of nearly all observers.

Council members who spoke in recent weeks had generally expressed
the idea that another rate cut was not what was needed at the moment.
For example, Executive Board Member Benoit Coeure said on September 23
that although “the jury is still open whether there should be another
rate cut,” he did not think it “absolutely obvious that another rate cut
would be necessary in the light of recent economic indicators and in
light of inflation developments.”

Speaking on September 17, Council member Josef Bonnici said that
the impact of a cut in interest rates would be “very limited” because
they are already so low. His colleague Ewald Nowotny said on September
25 that he saw “no need for a change in interest rates in the euro area”
and that he considered the theoretical possibility of a negative deposit
rate to be neither “desirable nor realistic.”

Accordingly, markets priced in only a 3% chance of a rate cut as of
this morning, and even at a seven-month horizon the probability is seen
currently at a mere 13%. It must be noted, however, that a high degree
of dysfunction in money markets has made Eonia and other measures less
reliable indicators of rate expectations than they once were.

Most likely, the press conference today will yield little news. The
ECB already announced details of its new bond-buying program, the
so-called OMT, and it is now waiting to see if there will be any takers
among the countries likely to need help in driving down spreads on their
sovereign debt.

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
November 8 back in Frankfurt. The ECB today held its monthly meeting
near the Slovenian capital of Ljubljana in accordance with its practice
of holding the meeting outside of Frankfurt twice a year.

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

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