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6 Mar 2014
All options on the table for ECB
FXStreet (London) - Heading into today's European Central Bank's monetary policy decision, the most likely outcome seems to be a hold of current conditions, with the ECB saving its bullets for the almost inevitable further deterioration of European economic recovery.
However, while a hold of rates appears the most likely scenario, little seems out of the question right now. A further small cut of the main refinancing rate may be used more for psychological than fundamental market effects, but there is still the possibility of negative rates, despite opposition from some ECB governing council members, notably Austria National Bank president Nowotny. The latter seems likely to be held in reserve for more difficult conditions.
Inflation hold may give ECB some breathing space
Flash Eurozone inflation numbers released last week may have taken a little pressure off the ECB.
Headline HICP inflation held at 0.8 percent, resisting consensus expectations for a decline to 0.7 percent, with food and energy price slowdowns offset by an unexpected increase in the core rate, climbing from 0.8 percent to 1.0 percent.
However, there are plenty of reasons to believe this was a brief respite before disinflationary pressures continue. Data released last week showed the Eurozone is still experiencing a business-harming contraction in private lending. Labour markets remain weak, with unemployment for the Euro area as a whole running at 12.0 percent with little downside pressure, while upside wage pressures remain extremely weak.
Anything possible
ABS buying, a further LTRO round or an end to sterlisation of the SMP are also an option.
Alongside the policy decision, it is likely we will also see some jawboning of the market, particularly around inflation projections.
A straight hold of rates with some support for current inflation projections should give EUR/USD some support. But the addition of an end to SMP sterilisation dent already-weak confidence in the robustness of the Eurozone recovery.
However, while a hold of rates appears the most likely scenario, little seems out of the question right now. A further small cut of the main refinancing rate may be used more for psychological than fundamental market effects, but there is still the possibility of negative rates, despite opposition from some ECB governing council members, notably Austria National Bank president Nowotny. The latter seems likely to be held in reserve for more difficult conditions.
Inflation hold may give ECB some breathing space
Flash Eurozone inflation numbers released last week may have taken a little pressure off the ECB.
Headline HICP inflation held at 0.8 percent, resisting consensus expectations for a decline to 0.7 percent, with food and energy price slowdowns offset by an unexpected increase in the core rate, climbing from 0.8 percent to 1.0 percent.
However, there are plenty of reasons to believe this was a brief respite before disinflationary pressures continue. Data released last week showed the Eurozone is still experiencing a business-harming contraction in private lending. Labour markets remain weak, with unemployment for the Euro area as a whole running at 12.0 percent with little downside pressure, while upside wage pressures remain extremely weak.
Anything possible
ABS buying, a further LTRO round or an end to sterlisation of the SMP are also an option.
Alongside the policy decision, it is likely we will also see some jawboning of the market, particularly around inflation projections.
A straight hold of rates with some support for current inflation projections should give EUR/USD some support. But the addition of an end to SMP sterilisation dent already-weak confidence in the robustness of the Eurozone recovery.