An Uneventful ECB Meeting: Keeping Interest Rate Unchanged With No New Measures

As expected, ECB keeps its main refinancing rate unchanged at 1% for the second month as policymakers believed current rates are 'appropriate. At the same time, no news measures of any other kinds were announced.

Since last October, the ECB has reduced its policy rate by 325 bps to unprecedentedly low level at 1% in May. Although the central bank once again refused to confirm it's the floor, it's widely understood that many of the Council members were reluctant to see interest rates going below 1%. Current economic condition, despite improvement has been shown in economic data, remains fragile. Rising unemployment and Negative inflation suggested further reductions are warranted.

At May's meeting, the central bank also announced to purchase 60B euro covered bonds denominated in euro issued in the Eurozone. Details on the program will be published later today and the purchase will begin July 6.

Concerning economic outlook, the ECB President Trichet said that a phase of recovery is expected around mid-2010. He was also happy with the result of the 12-month open market operation as it was 'enormously successful' and decline of EONIA (no between the main refinancing rate and deposit rate).

We believe ECB prefers to keep the current interest rate for a long time (i.e. 12 months) and use asset buying program and open market operation activities to provide liquidity to the public. If this strategy eventually proves to be unsuccessful, they will reduce interest rate again. That's why they never rule out any possibility.