ECB Cuts 0.25%, Less Than Expected

ECB Minimum Bid Rate Actual 1.25%, Expected 1.00%, Previous 1.50%

Release Explanation: This is the Interbank overnight lending rate. It sets the tone for mortgages, commercial loans, and all economic lending criteria. An increase in Interest Rate will have the effect of slowing economic growth. A decrease in Interest Rate is used by a Central Bank to stimulate economic.

Trade Desk Thoughts: The ECB reduced the Minimum Bid Rate to 1.25%, even though that market expected a 50 basis point cut. In the current rate cut cycle, the ECB has reduced the key interest rate by 300 basis points, down from 4.25%.

The market will now shift its focus to Mr. Trichet’s press conference, which starts approximately 45 minutes after the interest rate decision. It is expected that the President of the ECB will assess the downside risk, while explaining the reason why the bank cut less than expected. Currently, the Euro-zone economy is in a recession, with analysts estimating a recovery might not be likely until the early part of 2010.

Previously, ECB members have appeared reluctant to reduce the overnight rate too much, as it might spur inter-banking lending, and this was certainly seen today. Additionally, some suggested the ECB might announce a quantitative easing program during the press conference.

Forex Technical Reaction: The euro made an 80-pip spike at the time of the news release, extending the gains seen during the overnight session. However, the initial spike was almost completely retraced shortly after.

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