–Draghi To Explain Decision In Press Conference Starting at 13:30 GMT

FRANKFURT (MNI) – The European Central Bank’s Governing Council
surprised markets today by announcing that its Governing Council decided
to reduce the key refinancing rate by 25 basis points to 1.25%.

The bank also said it was cutting its marginal lending rate by 25
basis points to 2.0% and its deposit rate by the same magnitude to 0.5%.
By decreasing all three rates by the same amount, the ECB leaves its
corridor — the spread between the deposit rate and the marginal lending
rate — unchanged at 150 basis points.

While many market analysts thought a rate cut was warranted in the
face of a weakening Eurozone economy and, especially this week,
excacerbated debt crisis tensions, most did not believe the ECB’s new
president Mario Draghi would want a rate cut right out of the starting
block. Many thought he might prepare the ground for a rate cut in
December or even later.

One reason for this line of thinking was that Draghi, the former
Bank of Italy Governor, would need to distance himself from any charges
that he was a dovish southern European, softer on inflation than his
predecessor.

Moreover, inflation in the Eurozone has proven to be stubborn,
sticking in October at 3% — well above the ECB’s goal of slightly less
than 2%. While refusing as usual to pre-commit, monetary officials had
given no clear indication that a rate cut was in the offing. Indeed,
Vice President Vitor Constancio recently appeared to reconfirm the
predominance in the ECB’s anti-crisis approach of non-standard measures,
telling Market News International recently that “liquidity measures are
very important at the moment in view of the tensions in the money
markets.”

On the other hand, ex-ECB President Jean-Claude Trichet had left
the door open to a possible rate cut, announcing after the October
meeting that the decision at that time to hold rates unchanged was
reached by “consensus,” which means a significant minority of Council
members favored cutting rates. Their voices could only have been
emboldened by the intensifying signs of economic weakness and the
dangerous financial market events of this week, following the Greek
referendum announcement, in which borrowing rates for Italy soared to
era-record highs.

At his first press conference, to begin in less than 30 minutes,
Draghi will explain the rate cut decision. He may also shed some light
on the ECB’s willingness to continue buying Italian and Spanish
sovereign bonds in the light of recent market events.

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 deposit rate theoretically sets a floor for euro money market
rates, while the marginal lending rate is the ceiling. The ECB’s rate
cut today follows two rate increases earlier this year, in April and
July.

The next policy-making Governing Council meeting is scheduled for
December 8.

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

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