European Central Bank Keeps Interest Rate at 1.50%

The European Central Bank (ECB) maintained the Main refinancing operations rate unchanged at 1.50%, the Marginal lending facility at 2.25% and Deposit facility at 0.75%.  The Bank said "Inflation has remained elevated and incoming information has confirmed our view that inflation is likely to stay above 2% over the months ahead but to decline thereafter. At the same time, the underlying pace of monetary expansion continues to be moderate. Ongoing tensions in financial markets and unfavourable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year."

The ECB also announced a series of liquidity measures, including the commencement of further longer-term refinancing operations (LTROs), and continue its main refinancing operations (MROs).  The ECB also announced a new covered bond purchase programme (CBPP2) intended to purchase an amount of EUR 40 billion. The measures are designed to assist in the ongoing European debt crisis.

The meeting is Jean-Claude Trichet's last as the head of the ECB, as the new ECB president, Mario Draghi, takes the reins.  The ECB last increased the interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April this year.  The Euro Area reported annual HICP inflation of 3% in September, 2.5% in August and July, 2.7% in June (same as May) and above the Bank's inflation target of maintaining inflation below, but close to, 2% over the medium term.  

The Euro Area reported quarterly GDP growth in the June quarter of 0.2%, following a 0.8% increase in the March quarter, and a 0.3% increase in the December quarter of 2010.  The Euro (EUR) last traded around 0.75 against the US dollar, placing the Euro about flat against the US dollar so far this year.

In August the ECB stayed firmly in the headlines as it announced a resumption of its bond buying program (SMP - Securities Market Program) at its previous meeting, which initially did not include Spain or Italy, which drove a significant elevation in uncertainty.  

The ECB subsequently signaled it would in fact expand the purview of that program, and made significant purchases (22 billion in the first week of renewed buying, and 14 billion in the subsequent week).  The ECB also announced the resignation of key board member, Jürgen Stark.

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