LONDON The European Central Bank gave money markets no fresh signals that it was ready to lower interest rates in the near future at Thursday's news conference, but traders said prospects for a cut were still alive.
The central bank left rates on hold at 0.75 percent, deferring any change in borrowing costs while it waits for a cue to use its new bond-purchase program, and stating that inflation is expected to remain above 2 percent throughout 2012.
The lack of a strong reaction in financial markets showed the decision broadly confirmed the expectations of traders who borrow and lend money on a short term basis and are heavily influenced by ECB policy.
That said, recent grim assessments of the euro zone economy by the European Commission and the admission by ECB President Mario Draghi that unemployment was 'deplorably high' had raised some speculation of a shift in rhetoric towards more cuts.
"Those who were anticipating a change in Draghi's stance at this meeting in the wake of his dovish words, will have been modestly disappointed," said Rabobank strategist Richard McGuire. "Implicitly the door is open but we've got no explicit indication they are set to walk through it."
Euribor futures, a measure of interest rate expectations, had rallied by around 4 ticks in the previous session. They only gave up one tick of those gains during the course of the meeting, indicating some disappointment but that heightened expectations of a cut persist.
"The market had showed mounting expectation of further easing from the ECB. Next month will be important for driving the money market. The rally (in expectations) has been quite substantial so there is limited scope for a further rally now," said ING strategist Alessandro Giansanti in Amsterdam.
December's meeting will bring an update to its staff forecasts on inflation and growth which could, if they paint an increasingly poor picture of the euro zone, support the argument for more rate cuts.
Opposing that view is the ECB's acknowledgement that the 'monetary transmission mechanism', through which lower rates lead to cheaper borrowing throughout the euro zone, is still not functioning effectively.
The bank's main tool targeted at improving this mechanism is a bond buying program aimed at distressed countries like Spain, but this will not come into effect until they ask for and receive a euro zone bailout package -- a prospect that looks unlikely in the near term.
(Editing by Catherine Evans)