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ECO Focus - Edition September 1, 2011
ECB: time for a break
As a result of downside risks to activity and a more balanced outlook for inflation, the ECB's Governing Council is likely to leave policy rates on hold in the near term. It should shift to a more neutral monetary stance at the 8 September policy meeting, as pre-announced by Trichet during his hearing at the European parliament this week.
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Contents:
- No easy fix to the Eurozone sovereign debt crisis - Downside risks to global growth and financial conditions - Downside revisions to Eurozone growth and inflation to limit the need for monetary tightening - ECB’s separation principle to hold true |
Extract:
The key to the near-term outlook for ECB rates will be the speed at which the GC translates the latest financial developments into a reassessment of fundamental activity and price conditions. At a minimum, we would expect no 'strong vigilance' signal at the 8 September policy meeting, and thus no rate hike in October. In particular, the GC could ease its tightening bias by mentioning further uncertainty and downside risks to growth. This week, Trichet was fairly explicit during his hearing at the European parliament. The ECB President said he expected inflation to remain 'above 2% over the months ahead', while 'risks to the medium-term outlook for price developments are under study' in the context of the ECB staff projections that will be released early Septembe. This was in sharp contrast to the July and August statements (ie, potentially much more dovish), paving the way for a more neutral stance at the 8 September meeting. |
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