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

HELSINKI (MNI) – The European Central Bank’s Governing Council
decided at its monthly monetary policy meeting Thursday to leave its key
interest rate unchanged, the ECB announced.

The bank said that its key refinancing rate would remain at 1.25%
following April’s 25-basis-point hike, which was 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 left unchanged both its deposit rate, which is
the floor for euro money market rates, and the marginal lending rate,
which is the ceiling. The deposit rate stays at 0.50%, where it has been
since last month’s 25-bp hike. The marginal lending rate remains at
2.0%, after rising 25 basis points in April.

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 last month, the ECB effectively
raised the floor on short-term market rates, thus sending a signal that
it was happy to see more upward pressure on market rates.

Indeed, short-term market rates have risen since then, which is one
of the reasons why the ECB was unable this week to attract enough
deposits to fully sterilize the E76 billion worth of sovereign bonds it
has purchased.

The big question today is whether ECB President Jean-Claude Trichet
will give any indication of further tightening down the road. Although
monetary authorities including Trichet have repeatedly signaled that
they did not decide April’s move was the start of a series of interest
rate increases, several Governing Council members have since made
abundantly clear that rates will rise again and that the only question
is the timing.

Senior ECB officials have continued to affirm that inflation risks
are tilted to the upside and that monetary policy in the Eurozone
remains accommodative in view of still historically low interest rates.

The ECB will nonetheless want to tread carefully amid ongoing
geopolitical tensions abroad and a sovereign debt crisis at home, with a
rescue plan for fiscally ailing Portugal having been announced only
yesterday and talk of a debt restructuring by Greece still roiling
markets.

The Eonia swap curve is fully pricing in another 25 basis point
rate hike in July, with a 50% chance of that hike happening in June
instead. An additional rate hike of the same magnitude is fully baked in
for October, and yet another one for March 2012.

The next policy-making Governing Council meeting is scheduled for
June 9 and will take place in Frankfurt as usual; the Council today met
in Helsinki in keeping with its practice of occasional meetings in the
various Eurozone capital cities.

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

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