The Lead Up to the Main Event – ECB Cuts Rate

Today, the European Central Bank cut its key lending rate, as predicted, by a quarter point to 1% in the face of a looming recession, while investors awaited word from Mario Draghi on other measures aimed at addressing the euro zone’s sovereign debt crisis. Mario Draghi, is due to make a global appearance and statement shortly today. He will explain his reasoning for the rate cut and also his predictions for Europe. He will be keeping his statements limited allow the EC Summit to conclude their meetings tomorrow.

The big event will be the ECB president’s news conference, which will be watched for any new measures to help the euro zone’s struggling banking sector and any indication the central bank is ready to step up its purchases of government bonds. Every word, every statement, each sentence will be analyzed and explained as investors and politicians try to understand exactly what the ECB has in store.

The reduction is the second rate drop presided over by Draghi in just a months and brings the refinance rate back to a record low, undoing a half-point worth of rate hikes implemented earlier this year.

The ECB also lowered the interest rate on its marginal lending facility by a quarter point to 1.75% and cut the interest rate on its deposit facility by a quarter point to 0.25%.

In the most poorly kept secret in Europe, Draghi is widely expected to announce the ECB will provide a larger range of long-term loans to commercial banks, including two- or possibly three-year maturities in an effort to combat signs of stress as fears of default and debt-market carnage make banks wary of lending to each other but the ECB chief is seen as likely to hold off on committing to more aggressive efforts to battle the debt crisis by stepping up its bond-purchase program until after a closely-watched European Union Summit ends on Friday.

 

The announcement had surprising little effects on the market.  Currencies traded in tight ranges in after the expected decision by the European Central Bank. The euro was recently trading at $1.3412 compared with $1.3413 late Wednesday in New York, and slightly higher than before the ECB announcement.

Concurrently the Bank of England, BoE’s Monetary Policy Committee has just announced its decision to maintain its key policy rate unchanged at 0.5%.

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