Last week’s data has given rise to renewed speculation about further ECB action. Headline inflation below 1% and unemployment above 12% have fueled market speculation that the ECB could cut rates at this week’s meeting.
In our view, this speculation is premature for two main reasons: (1) the ECB simply does not have a reputation for knee-jerk reaction to single data releases; and (2) a rate cut would do little to kick-start the economy as long as the transmission mechanism is not working properly. Even if deflationary trends have opened the door wider for further ECB easing, we don’t expect such action this week.
