No hints of tighter policy

The ECB will leave interest rates on hold at 1.0% at its November policy meeting and we do not expect it to announce any significant change in its policy of providing generous loans to the banking sector. The Bank might scale back its liquidity provision in the next few months. But the impact of this would be limited given that banks are now demanding less loans from the ECB anyway. The key point is that bank lending to the wider economy is likely to remain weak, consistent with only a modest recovery in overall activity. With the risk of deflation lingering on, official interest rates should not rise for a very long time.