Welcome, Mr. Draghi, to a hell of a job
- Inflation is still near its peak and......
- ...the hard eco data have not yet confirmed the deterioration in sentiment.
- The EMU Summit details need to be specified and implemented....
- ...while of critical importance the incoming new president cannot sow …doubts about continuity of the stability-oriented of the ECB...
- Therefore, no new decisions on policy, but the door for policy easing.....
- ... will remain wide open.
The ECB meeting on Thursday will be watched very closely because it will set out the ECB response to the EMU Summit decisions. It will put the new ECB president under the spotlight at a time when credibility is seen as very important. However, we don’t think it will bring any significant new policy measures.
In September, the ECB downgraded its risk assessments to economic growth and inflation to respective downward and neutral. It effectively meant that its tightening cycle was at least interrupted. In October, it went further. It took a range of decisions on the non-standard policy measures, in particular by launching a new 40 billion euro covered bond purchase programme, by prolonging the full allotment fixed rate procedure on its MRO, one-month STRO and 3-month LTRO’s till mid 2012 and by re-introducing 2 oneyear LTRO’s of which the first has been done last week. The ECB left its main re-financing rate unchanged at 1.5%. It however did no longer qualify the monetary policy stance as accommodative and Trichet during the press conference admitted that the Governing Council had considered both keeping rates unchanged and lowering them. From his answers at the press conference, it was obvious that some members were in favour of cutting interest rates. However, Trichet stressed a few times not to underestimate the importance of the non-standard measures that were taken. So, one could eventually argue that the ECB didn’t want to take the attention away from these non-standard measures to support the financial system by cutting rates at the same meeting. So, the legitimate question is whether they will cut rates at this week’s meeting.
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