Highlights:
- Economic and inflation developments don’t point to the need of a third consecutive rate cut…
- as the ECB doesn’t want to be considered too aggressive
- … Mr. Draghi to confirm ECB position on SMP programme…
- …All in all, the meeting may have no lasting impact on markets
At the December policy meeting, the European Central Bank cut interest rates by 25 basis points and announced a wide range of new mechanisms intended to improve the liquidity situation of Euro area banks. However, the most important aspect of the press conference was a seemingly firm rejection of the idea that the ECB might alter its bond buying programme or that it will opt for more radical action to ease the sovereign debt crisis. The ECB is likely to forcefully stick to this view on Thursday. We also think it is unlikely that it will cut rates further this month for a number of reasons we elaborate on in the next paragraphs.
Economic outlook unchanged Since December, the economic situation as painted by the most recent set of data hasn’t changed a lot. The outlook remains bleak, with negative growth likely in Q4 2011 and probably also in Q1 of 2012 likely. However, the PMI Business Index increased in December for a second month in a row. At 48.3, the composite indicator still suggests a decline in activity, but the pace of deterioration has moderated. There wasa somewhat poorer message from the European Commission economic confidence index, which lags slightly the PMI, but which also has a broader scope, including for instance consumer confidence. Industrial confidence, a sub-index, did improve slightly in December, but only for the first time. Global industrial confidence was higher and most recent US eco data, notably the labour market indicates are encouraging.
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