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Jan ECB Meeting Unlikely To Surprise

Jan 23 2020, 08:03 PM (BDT) |

Investors look to today’s ECB’s monetary policy meeting knowing full well that the central bank will maintain the status quo. At best, the ECB will only review the impact of its monetary policy so far.

In terms of any surprises, the chances are minimal.

From a monetary policy perspective, the central bank will maintain interest rates at 0%. The marginal lending rate is likely to remain at 0.25% and the deposit facility rate at -0.50%. The central bank will also keep the asset purchases at the current 20 billion euro a month.

The decision to leave rates and asset purchases unchanged comes as the governing council prefers to assess the impact. The ECB last made changes to its monetary policy in September 2019.

This was done in response to sluggish inflation and slowing growth. This came at a time when the German economy was particularly hit hard. Being the growth engine for Europe, the decision came out as a timely response to stoke growth.

Regarding the larger scope of the monetary policy path, investors are also well aware that new ECB Chief Christine Lagarde, will be sticking to the tried and tested familiar path set by her predecessor, Mario Draghi.

Assessment of the Eurozone Economy

Since the September monetary policy changes, growth looks to have returned to the eurozone. However, this is something that is yet to show. Investors will be waiting for the Q4 GDP performance.

The preliminary GDP report for the eurozone is due on January 31st. However, early indicators such as the PMIs suggest that growth has stabilized. This was evident in the minutes of the December meeting.

The ECB released the December ECB meeting minutes last week. The report indicated that members of the ECB’s governing council were optimistic about growth. Although GDP is unlikely to turn the corner, preliminary data suggests that growth is stabilizing in the region.

Despite the slight optimism, the governing council members remain wary of the downside risks and a bit skeptical of the industrial output in the region.

Consumer price data last week confirmed that headline inflation grew at a pace of 1.3% on the year ending December 2019. While this is still far away from the target inflation rate of 2.0%, there were some positives to take away.

For example, at one point, inflation in the eurozone dropped below 1%, indicating that consumer prices could further deviate from the ECB’s target.

Given the overall preliminary data, the ECB is likely to give a cautious but optimistic review in its assessment of the eurozone economy.

Focus on ECB’s Strategic Review

Last week, news outlets reported that the ECB was preparing for a strategic review. This comes after the fact that the ECB Chief told policymakers to remain tight-lipped on the review.

The ECB strategic review will take place at today’s meeting after the members received the documents last week. Given the confidentiality of the strategic review, speculation has risen on what constitutes the strategic review.

Some of the speculations include the ECB’s approach towards a symmetrical inflation target, as noted by Francois Villeroy, a member of the ECB governing council and President of the Bank of France.

But opposition remains in the form of German Bundesbank Chief Weidmann who said that there was no need to tinker with the inflation target.

The strategic review might not see any big impact on the forex markets today. At best, if we do see any big changes, they can only be felt over the course of time. EURUSD and EURGBP will be the main currency pairs that will exhibit some form of volatility heading into today’s meeting.

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