–Focus Turns To Trichet 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
interest rate at 1.50%, the ECB announced.

The bank’s decision to leave monetary policy unchanged surprised
hardly anyone, given that monetary authorities only last month
implemented the second increase of the current tightening cycle
following a first 25-basis-point hike in April, and in the intervening
four weeks had given no indication of an immediate next step.

Indeed, growing risks to real economic developments, the rapidly
worsening sovereign debt crisis in Europe and generally tamer commodity
prices have all clearly militated in recent days against any imminent
further withdrawal of monetary accommodation.

In more normal times, the refi — or minimum bid — rate would be
the lowest rate at which banks could seek ECB financing in competitive
bidding at the ECB’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 has made clear for months that it wants to return to
competitive bidding on its refinancing operations. Nonetheless, it said
last month yet again that it would retain its full-allotment, fixed-rate
regime for one-week and three-month operations for now.

When it does restore competitive bidding, the ECB will almost
certainly do so on the three-month operations first and leave full
allotment in place on the weekly MROS for some time after that. But
officials, including ECB President Jean-Claude Trichet, have been
non-committal on when the ECB might make its move towards the exit,
preferring just to note that the bank has always said its non-standard
measures were temporary.

The ECB today also left untouched both its deposit rate, which is
the floor for euro money market rates, and the marginal lending rate,
which is the ceiling. Following 25-bps hikes last month in each of them,
the deposit rate thus remains at 0.75% and the marginal lending rate at
2.25%.

This leaves the so-called corridor — the difference between the
floor and ceiling rates — at 150 bps. At some point the ECB presumably
intends to restore the corridor to 200 bps, though it does not seem to
consider this a pressing issue.

While Trichet may reaffirm today that monetary policy in the
Eurozone remains accommodative in view of still historically low
interest rates, the factors noted above will probably lead him to
refrain from signaling clearly the timing or even the anticipation of a
further hike in official borrowing costs.

Reflecting these factors, analysts have already scaled down their
expectations of another hike before the end of the year. Markets are no
longer pricing in a full rate hike before the end of 2011, but there is
some tightening factored in near term. That is in distinct contrast to
the situation a month ago; at the time of July’s rate announcement, the
Eonia swap curve had priced in a 55% chance of yet another hike by
end-2011.

The next policy-making Governing Council meeting is scheduled for
September 8 in Frankfurt.

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

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