Deterioration in Euro area monetary and financial conditions

Euro area financial market conditions have tightened since the last meeting of ECB. The euro reached an inflection point by mid July and since then it has appreciated on a REER basis by more than 6% (the NEER by over 7%). Elevated volatility in energy and commodities, equities, and concerns about Chinese and EM growth prospects have worsened. As shown on above Figure, the in house Financial Conditions Index of Barclays has tightened quite significantly over the summer. 

"However, we consider that the tightening in financial conditions experienced over the past three weeks could jeopardise these favourable trends, and are likely to be picked up by the ECB in their discussion. The main conclusions of QE Monitor updated in 27th August are similar to those we presented in July: monetary policy is gradually working its way through the economy, with ECB balance-sheet and market-based indicators mostly in the "green", but macroeconomic indicators are still lagging as the transmission to the real economy takes time", says Barclays in a report to its client.