–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 hike its key
interest rate by 25 basis points, the ECB announced.

The bank said — in an announcement delayed, unusually, by more
than a minute for reasons unknown — that its key refinancing rate would
thus rise to 1.25%, the first change since a 25-point cut that was
decided at the Council’s May 7, 2009 meeting.

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 is moving closer to returning to competitive bidding on its
three-month LTROs, though it is not under pressure to announce any
changes until June, when the current refinancing calendar expires. It
would probably leave the fixed-rate, full allotment terms on its weekly
MROs in place for some time after it reverted to competitive bidding on
the three-month operations.

The ECB today also boosted its deposit rate — which is the floor
for euro money market rates — by 25 basis points to 0.50%, and the
marginal lending rate — which is the ceiling — by 0.25 to 2.0%.

This leaves the so-called “corridor,” the difference between the
floor and ceiling rates, at 150 basis points. By lifting the deposit
rate along with the refinancing rate, the ECB is effectively lifting the
floor on short-term market rates, thus sending a signal that it would be
happy to see more upward pressure on market rates.

After ECB President Jean-Claude Trichet heightened his inflation
rhetoric at the start of the year and then startled markets last month
with a virtual rate hike pre-announcement, speculation arose as to
whether or not the ECB would actually follow through with a rate
increase today.

Geopolitical tensions in Arab countries and the triumvirate of
catastrophes in Japan initially left observers thinking the
never-pre-committed ECB could decide to forestall tightening until the
new uncertainty lifted.

However, public statements by numerous Governing Council members in
recent weeks have made it clear that the ECB is not sufficiently worried
about the unusual turbulence of world events to allow growing Eurozone
price stability threats to go unchecked.

As a result, markets unanimously expected a first rate hike of 25
basis points today. Eonia swaps are showing that markets fully expect
another 25 basis point rate hike by August, and a third by November.

The next policy-making Governing Council meeting is scheduled for
May 5 and will take place in Helsinki.

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

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