The ECB expects “sustained real GDP growth broadly in line with trend potential”, according to the statement released after yesterday’s policy meeting. They are either in denial or – more likely – talking tough because of near-term inflation concerns.

Key leading indicators have deteriorated sharply in recent months. As an example, business expectations in the services sector purchasing managers’ survey has fallen to its lowest since November 2002. Historically, the ECB has been cutting rates when this series has been at current levels – see first chart.

Spain looks increasingly at risk of a nasty recession. Residential investment accounts for over 7% of real GDP and housing construction approvals fell 51% in the third quarter from a year before – see chart. Monetary trends are also alarming, with inflation-adjusted narrow money now contracting on an annual basis (see also here).

My ECB-ometer suggests a neutral policy stance is now warranted by incoming data. The hawkish rhetoric looks increasingly unconvincing.