Forex News – ECB expected to cut interest rate by 25 basis points

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The euro is holding steady in the European session trading today as investors wait on the sidelines for the European Central Bank policy meeting schedule for 12:45 GMT.

The central bank is expected to ease policy and announce a rate cut, lowering the current rate by at least 25 basis points. This would bring the key rate down from 1.25 percent to 1.00 percent.

If indeed the rate is lowered, this would be the ECB’s second rate cut in as many months today. But new ECB President Mario Draghi’s pronouncements on efforts to push progress on a tighter fiscal union in the euro zone will likely carry more weight as European leaders gather in Brussels to begin the EU Summit meeting.

Investors will be looking for further clues that the central bank is willing to expand its bond-buying program after the ECB president last week told the European Parliament that “other elements might follow” if European leaders put together a credible “fiscal compact.”

These comments involved key “code words” that the ECB could be prepared to expand its controversial bond-buying program if European leaders move to enshrine what have been laxly enforced fiscal rules.

Economists say that expanding the program would provide valuable assistance in the fight to keep borrowing costs from spiralling out of control in Italy, the euro zone’s third-largest economy and the world’s third-largest bond market, and Spain. Bailouts for either country would outstrip the euro zone’s resources.

But economists also don’t expect Draghi to go much beyond last week’s statement as European leaders prepare for a crucial summit meeting.

Meanwhile BNP Paribas said in a note today that while a 25 basis point rate cut is largely priced into the euro, analysts are flagging the risk of a bigger-than-expected cut, which would send the single currency lower. “We’d expect little immediate reaction to -25 bps, while on -50 bps the implication that the ECB is now that much closer to entering into a formal QE programme is likely to see the euro extend losses,” BNP Paribas said.