With indicators of economic activity improving slightly, the ECB is unlikely to cut interest rates this month. Meanwhile, divisions within the Governing Council might prevent it from clarifying last month’s pledge to keep rates low for “an extended period”. This will leave the Bank lagging further behind others, potentially putting more upward pressure on the euro exchange rate in the near term. We still see the ECB cutting rates before long and it might also offer more very long-term loans to banks to complement the recent loosening of its collateral criteria. But it is unlikely to rescue struggling peripheral economies by buying their bonds without very strong conditions attached.
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