Financial turmoil takes centre stage

The euro-zone activity outlook has weakened further, but September’s dramatic financial market and banking sector developments have obviously grabbed the limelight. With a number of euro-zone governments stepping in to rescue ailing banks, it is clear that the region’s banking system is suffering the effects of the credit crunch too. As President Trichet has stressed that the ECB will continue to keep monetary policy and measures to aid financial markets completely separate, imminent interest rate cuts so far look unlikely. Nonetheless, as inflation slows further, we expect the ECB’s attention to turn to the weakening real economy and see rates eventually reaching 3.0% by the end of 2009.