In consequence, as pointed out in this column last month, markets have been able to anticipate the ECB’s decisions from month to month without being seriously wrong-footed. What is less clear, however, is whether or not the markets are correctly interpreting the indications that Trichet has been giving as to the likely course of monetary policy over horizons longer than one or two months ahead.
In principle, the ECB’s policy stance for the medium term is clear enough. In Trichet’s words to successive monthly press conferences, interest rates are “still low in both nominal and real terms”, liquidity remains “ample by all plausible measures” and monetary policy “continues to be accommodative”. Hence, “if the governing council’s assumptions and baseline scenario” for the eurozone economy – currently characterized by the ECB staff’s September macroeconomic projections for 2006 and 2007 – “continue to be confirmed, a progressive withdrawal...
