Carsten Brzeski, Chief Economist at ING, suggests that the markets will be eyeing the ECB and hoping that the Mario Draghi can perform his magic and get a white rabbit out of his hat.
Key Quotes
“Waiting for the slowdown. To give the ECB some credit, the concerns voiced at the January meeting were justified. Since the January meeting, the Eurozone economy has actually done what the ECB had feared and has been slowing down. Confidence indicators have taken a substantial hit and both headline and core inflation have come down. Even though the only hard data available so far for January (retail sales) was positive, the Eurozone economy appears to be suffering under a weaker external environment and political uncertainties in a couple of member states.
Staff projections should confirm weaker outlook. Special focus will be on the latest ECB staff projections, not the only one but clearly one of the most important elements for the ECB to decide on further action. Back in December, the outlook for both growth and inflation was relatively stable, tilted to the positive side. The weaker external environment and the drop in confidence indicators since then have made a downward revision of both the growth and inflation projections very likely. In our view, the key forecast for ECB policy-making will be the inflation forecast. Just looking at the external assumptions of oil prices and the exchange rate, the further drop in oil prices and the appreciation of the nominal effective exchange rate could easily shave another 0.3ppt off the December inflation forecasts (1.0% for 2016 and 1.6% for 2017).
New action could bring negative risks. With faltering growth momentum, another downward revision of the inflation outlook, and echoes of Mario Draghi’s comments at the January meeting, the ECB will likely have no option other than to announce more monetary stimulus.
Inactivity the worst option. Despite increased risks related to further action, inactivity seems the worst option for the ECB. We think Draghi will deliver a mix of several small, but above-consensus, steps: a 20bp deposit rate cut, either two-tiered or with some other compensating measures for the banks, a broadening of QE scope and a 5bn euro increase in monthly QE purchases. On top of all, some verbal intervention suggesting that the ECB would tolerate overshooting of the inflation rate would also help to prop up inflationary expectations.”
(Market News Provided by FXstreet)