ECB Preview: It’s All About The Strategy

The official start of the strategy review should be the highlight of this week’s European Central Bank meeting. For any (subtle) changes in the ECB’s risk assessment or forward guidance, market participants will have to wait until March.

This week’s press conference should be a rather risk-free practice area for ECB President Christine Lagarde to further sharpen her own communication style and monetary policy skills. While we expect the ECB to announce the official start of the strategy review, the meeting should be rather uneventful regarding monetary policy.

Signs of bottoming out no reason for change

The ECB’s macro assessment will, in our view, not have changed since the December meeting. Data released since then suggest that the eurozone economy seems to have reached a period of bottoming out, even though there are still very few signs of a rebound in the manufacturing sector. There is still the risk that the lagged impact from the manufacturing slowdown on the labour market comes before a significant rebound in industrial activity. As a consequence, the bottoming out phase could still last until the summer. As regards inflation, the gradual increase in core inflation since last summer has comforted the ECB’s view of a gradual pick-up in underlying inflation. However, the longer it takes for a significant rebound of the entire economy to materialise, the higher the chance that core inflation measures start dropping again.

All of this means that the ECB will currently stick to its wait-and-see stance, confirming the two small additions to its assessments of risks to the growth and inflation outlook. Remember that in December the ECB had changed the phrase describing the risks to the economic outlook to “still tilted to the downside but somewhat less pronounced”. Looking beyond this week’s meeting, the ECB could further change the risk assessment in case of an actual rebound of the eurozone economy in the coming months. In such a scenario, we would expect the ECB to drop the easing bias in its forward guidance on rates.

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