The European Central Bank (ECB) held its main interest rate at a record low of 1 per cent for the fourteenth month running today, as expected by economists.
The widely expected decision came ahead of a news conference at which ECB president Jean-Claude Trichet will face pressure to say whether the central bank will extend liquidity support and how he sees Europe's bank stress tests panning out.
All 76 economists recently polled by Reuters had expected the ECB to keep interest rates at 1 per cent. The euro was unchanged against the dollar after the decision, while Bund futures were steady.
Official data earlier showed euro-priced interbank lending rates hit their highest levels in 10 months today.
The creep up in the bank-to-bank lending rates came amid signs of slowing euro zone growth and market concerns that the Europe-wide bank stress tests will not be tough enough.
Throughout the crisis, the central bank has sought to address worries by offering banks extra cash. Market players will look for guidance on whether the ECB plans to extend its liquidity support beyond the current end-date of mid-October.
They will also want the central bank to spell out more details of the government bond purchase programme it began in May to contain Greece's and the euro zone's debt crisis.
The high-profile stress tests being carried out on a sizeable chunk of Europe's banks will be a further focus for the ECB's news conference. The health checks go to the root of the woes dogging the euro zone's financial sector.
Mr Trichet is, like last month, likely to give little away on the central bank's plans for liquidity support and bond buying.
Prior to last month's meeting the euro had fallen 17 per cent in six months on a trade-weighted basis - its most dramatic drop on record - on fears the euro zone debt crisis could force troubled members out of the single currency. The euro has gained back some of the ground since then.
The ECB is likely to take comfort from banks' apparent trouble-free repayment of €442 billion in emergency loans last week - an obligation they met with only modest demand for funds from the central bank aimed at smoothing the process.
Annual inflation in the euro zone was lower than expected at 1.4 per cent in June, data released last week showed, pointing to subdued prices pressures despite an improving economy. Economic growth was 0.2 per cent quarter-on-quarter.
Markets will be looking for anything the ECB can say on the progress of the bank stress tests, which European Union bank regulators are conducting in the hope of restoring confidence in markets worried about ballooning public debt.
Markets are so far unconvinced the tests, whose results are due to be published on July 23rd, will be tough enough and Mr Trichet will be pressed to offer some insight into their likely outcome.
Europe has listed 91 banks taking part in the tests - including many regional banks where markets suspect most of the sore spots are - as it seeks to restore confidence in the sector.
Mr Trichet said on Sunday the tests would be an "important element" in restoring market confidence. They could also trigger a return in risk appetite if lenders perform well.
Reuters