Highlights:
- ECB to begin a slow turn?
- ECB likely to change views on inflation and growth only modestly.
- Divisions on SMP programme the key issue.
At its August meeting, the ECB didn’t change its policy position. It described the stance accommodative and financing conditions favourable. Risks to the medium term outlook for price developments remained on the upside, those for economic growth balanced. In this context, the ECB said it would monitor very closely all developments with respect to upside risk to price stability. Despite this largely unchanged rate policy, there were hints of subtle, but substantive changes in thinking. Regarding their nonconventional policy, the ECB took far-reaching measures by holding one 6-month LTRO liquidity providing operation and prolonging the Full allotment/ Fixed rate procedure for the MRO, 1- month STRO and 3-month LTRO at least till the end of year. Mr. Trichet during the press conference also hinted that the SMP (bond purchasing programme) was re-activated. That was a month ago – a very long time in terms of changes in economic circumstances.
The ECB will once more face a difficult situation when it meets on Thursday. The economic outlook has darkened appreciably in recent weeks and the debt crisis flared up in a couple of very threatening ways. So, markets again look to the ECB for help, but the options the ECB has are limited. Of course, the ECB is not an activist central bank by nature. Therefore, markets may be disappointed, even if we expect the ECB will take a first step towards a neutral policy stance.
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