Policy Patience

- "At the last two monthly press conferences, ECB President Trichet acknowledged the then normalisation trend visible in markets. Nevertheless, there was no complacency about the challenges that lay ahead. Had normalisation continued, the ECB may have been prepared to re-engage the ‘gradual exit’. However, market events over the last month suggest the potential cost of an early exit from full allotment liquidity probably exceeds the risks from being more patient. As such, it seems likely that the ECB will announce on September 2 to push-back the exit from the full allotment regime from Q4 2010 until at least Q1 2011."
- "Beyond the push-back on the exit from full allotment, the ECB is likely to remain prudent and cautious. We expect the neutral bias on the monetary policy stance to be retained. The staff macroeconomic forecasts probably won’t change much, other than an upward revision to 2010 GDP growth care of the stronger-than-expected outturn to Q2. Nuance will be important. The Council’s rhetoric on global activity could weaken and exports as an upside risk to growth could be dropped. That could presage expectations of a longer spell of full allotment liquidity and unchanged rates."
- "Also in this week’s Focus Europe we delve into S&P’s raised estimate of the Irish banking crisis which caused the agency to cut Ireland’s sovereign credit rating to AA-. It has been called “extreme” and “flawed”, but if S&P’s estimate credibly draws the upper boundary on the cost, it could be an important source of surety for the market. We also review the latest euro area inflation expectations data, including forward-starting breakevens which have fallen to new lows; the state of the Swedish recovery, the outlook for Riksbank policy and the upcoming election; and the impact of declining worker remittances on Romania’s current account position."

DeutscheBank Focus Europe 20100827

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