NO EARLY XMAS PRESENTS FROM THE ECB OR BOE. As widely expected, both the ECB and BOE left their major policy settings unchanged. Updated ECB forecasts were unveiled, with ECB having become gloomier about the growth outlook. The mid-points of its latest staff forecasts imply that GDP will fall by 0.5% this year and a further 0.3% in 2013, before rising by just 1.4% in 2014. Underlying price pressures are forecast to “remain moderate”, with annual CPI inflation set to fall below 2% in 2013. At the ECB press conference, ECB President Draghi noted that the central bank had committed to maintaining a very accommodative monetary policy stance, extending its main refinancing operations to “at least” mid 2013. While the ECB stood ready to purchase Spanish Bonds (via its Overnight Monetary Transactions programme, OMT) Draghi declined to make any firm commitment over the level of support the ECB might be prepared to offer the Spanish Government if it requested a bailout. His comments on Greece gave the impression that the ECB and Eurozone governments felt they had already done enough. The prospect of interest rate cuts were also discussed, but it appeared that that the appetite for a reduction in rates is being constrained by the “significant” improvement in financial market conditions – both bond and equity markets – since the OMT announcement. Nevertheless, Draghi conceded that while a “significant amount of liquidity” has been injected into the system, to a large extent this liquidity has not reached the real economy. Monetary policy has its limits the extent to which providing further liquidity will alter the gloomy outlook is debateable.
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