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,” TheLFB-Forex.com Trade Team said.
TheLFB-Forex.com Trade Desk Thoughts: The ECB reduced the Minimum Bid Rate to 1.00%, inline with the market’s expectations. In the current rate cut cycle, the ECB has reduced the key interest rate by 325 basis points, down from 4.25%. Additionally, the ECB decided to reduce the interest rate on the marginal lending facility by 50 basis points to 1.75%, while leaving unchanged the interest rate on banks deposits, at 0.25%.
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 announcing a new quantitative easing plan. Currently, the Euro-zone economy is in a recession, with analysts estimating a recovery might not be likely until the early part of 2010.
TheLFB-Forex.com Trade Team notes that previously, ECB members have appeared reluctant to reduce the overnight rate too much, as it might spur inter-banking lending.
Forex Technical Reaction: The euro made a 70-pip spike after the news release, approaching Wednesday’s high. Over the last few trading sessions, the euro traded mixed, but now the pair has plenty of room to move.