ECB Cuts Rates by 0.25% to 1%

The European Central Bank cut its benchmark Minimum Bid Rate by 0.25% to 1%, as expected. The new president of the ECB, Mario Draghi, fully reversed the rate hikes made by his predecessor Jean-Claude Trichet earlier in the year.

EUR/USD traded just above 1.3380 before the release, at the lower end of the 1.3360 and 1.3420 lines. EUR/USD moves up to 1.34.

Update: the 1.3420 line caps the pair for now. See the live blog of the press conference.

Some market participants discussed a bigger rate cut, but the chances were very low. The ECB doesn’t tend to make big moves, and it never had an interest rate lower than 1%. It held the 1% rate for around two years until April’s hike by Trichet.

The focus of the market now shifts to the press conference, in which Draghi will probably introduce new measures to shore up banks: extended loans and easier collateral rules.

Will the president of the ECB announce a larger scale of bond purchases (Quantitative Easing) and be “Super Mario”? Or will Draghi be a drag on the markets? See the ECB Preview for details.

Earlier today, a report about a circular IMF loan worth 150 billion euros floated. This is certainly not enough.

For more on the single currency, see the euro dollar forecast.

Inflation remains elevated at 3%, but the current governing council of the ECB also looks at the underlying economies, and sees a grim picture of a recession. In addition, the debt crisis is spilling into the real economies of all euro-zone countries, and actually all the world.