Mario Draghi
Mario Draghi President of the European Central Bank (ECB) sits between Commerzbank CEO Martin Blessing (L) and Deutsche Bank Co-CEO Juergen Fitschen (R) prior to the start of the European Banking Congress at the old opera house in Frankfurt, November 22, 2013. Draghi said on Friday that in addition to national backstops, joint European backstops need to be in place before the ECB’s bank tests are finished in one year’s time. The tests are billed as the most rigorous assessments the banks have ever had, designed to remove doubts about their health after botched EU stress tests in 2010 and 2011 which failed to reveal major problems at some lenders. REUTERS/Kai Pfaffenbach

As expected, the ECB elected to leave the benchmark euro area refinancing rate unchanged in December at 0.25%, and the deposit rate unchanged at 0%.

Last month, following the central bank’s November governing council meeting, the ECB surprised market participants by cutting the rate from 0.50%.

ECB president Mario Draghi will hold his monthly press conference and Q&A with reporters beginning at 8:30 AM.

“In the euro area, where the policy rate is close to the zero bound, the reaction function of the ECB has become increasingly difficult to calibrate,” says Morgan Stanley economist Elga Bartsch. “On balance, we expect the ECB to lower the refi rate by 15bp in 1Q to just 10bp but leave the depo rate unchanged. But we see an almost 50-50 chance that the ECB will also push the depo rate below zero. It is clear from the press conference that such a step was debated at the November meeting. Eventually, the Governing Council decided against such an unprecedented step though — most likely in recognition of the unintended consequences and potential unanticipated effects that a negative rate could have.”

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