Frédéric Prêtet, Research Analyst at Scotiabank, expects no change in the management of ECB monetary policy when the Committee meets today and suggests that the focus will therefore mainly be on the outlook for the macroeconomic scenario and any hint of a more hawkish bias.

Key Quotes

“Q4 GDP growth at 0.4% q/q was in line with the ECB’s assumption and the ongoing rise in all business surveys points to a significant acceleration at the beginning of the year. As a result, 2017 GDP growth could be revised slightly up.”

“With higher oil and food prices, 2017 inflation forecast could be revised up by 0.3%–0.4%, and then get closer to the ECB’s inflation price stability target of “below, but close to, 2.0%”.”

“Shifting to a balanced risk?  

• In view of all recent economic data and these potential upward revisions to the macroeconomic scenario, the tone of the ECB President could turn more hawkish. Indeed, our traditional indicator on the ECB’s policy reaction based on both monetary (credit growth & headline inflation) and activity (PMI manufacturing & consumer confidence) data has shifted to the hawkish side. Up to now, the ECB President has kept a dovish bias. It is true that stronger headline inflation has not yet spilled over to core inflation. Also, the rising political uncertainty creates the risk of potential shocks in the economic recovery.
• Nonetheless the current global macroeconomic and inflation pictures strengthen the positions of the hawks inside the board. 5y in 5y forward inflation swaps—a key gauge to assess the ECB’s credibility in restoring price stability—have recovered to 1.70% or above; that is higher than when the ECB decided to implement its quantitative easing program (QE). While gradual, we therefore expect the tone of the ECB President to turn more neutral and the illustration could be the decision to shift the balance of risk on the macroeconomic scenario from “downside” to “balanced”.”