ECB preview: Many risks, but no change to the baseline

The ECB Governing Council will hold next week its regular monetary policy meeting. We don’t expect any change in the policy stance or the key parts of the introductory statement. Th e current “risk-off” mode in financial markets , d evelopments in Italy and a rising risk of a hard Brexit provide plenty of reason to sound a more cautio nary note . That said, financial conditions have only tightened moderately so far and latest data still remain consistent with the ECB’s baseline scenario of a n on-going expansion of the euro area economy. Hence, we would expect only small tweaks in the language to reflect the rising uncertainty. With respect to the situation in Italy, the ECB is neither able nor willing to respond to country specific developments. It is only when there are clear signs of contagion that the ECB may se e a need for a policy response. In this context, it is too early to judge whether the most recent spread-widening seen in other peripheral countries will be lasting or not. The ECB may publish details on its re-investment policy after the end of the APP. We would expect the new guideline s to allow a somewhat higher degree of flexibility along several dimensions (timing and maturity) . However, as President Draghi has already made clear the “capital key will remain the guiding principle” .