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 has cut the Minimum Bid Rate by 50 basis points, down to 2.00%, the lowest rate seen at the European bank in the last few years. This comes, after last month the ECB reduced the overnight rate by 75 basis points, despite the market's expectations of a 50 points rate cut.
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 Chairman of the ECB will assess the downside risk, while saying that the bank might take steps that are more cautious in the future. Currently, the Euro-zone economy is in a recession, with analysts estimating a recovery might be likely in the second part of 2009. Previously, ECB members had appeared reluctant to reduce the overnight rate too much, as it might spur inter-banking lending.
Forex Technical Reaction: The euro made a 30-pip spike at the time of the news release but the pair continues to trade within the same range, unable to move decisively in either direction. Since the last ECB meeting held on December 4th, the euro is trading approximately 450 pips higher.