ECB to stay on the sidelines in January - RBS

According to the research team at RBS, the Governing Council meeting on Thursday is unlikely to give significant new clues to the ECB’s reaction function.

Key Quotes

“Policy settings will almost certainly remain unchanged, with the depo rate at -0.4% and QE purchases at €80bn per month until end-March 2017, stepping down to €60bn from April 2017.”

“Since the December policy meeting, the data have been solid. December flash HICP surprised to the upside, released at 1.1% y/y, up from 0.6% in November and against the market consensus of 1.0%. The December HICP outturn is also slightly above the ECB’s forecast from the latest quarterly macroeconomic projections (December).”

“Activity data and surveys have also been strong. Industrial production for November beat expectations at 1.5% m/m (vs. consensus at 0.6%), while the October outturn was also revised up. Eurozone PMI survey reached multi-year high levels in December, with the composite index at 54.4, suggesting a pick-up in Q4 growth rate (likely to 0.4% q/q from 0.3% q/q in Q3).”

“We believe the Governing Council’s economic assessment may be slightly more optimistic, but the policy debate should be unchanged and simply reference the decisions taken in December. (See our take on the December minutes by Giles Gale here). A ‘significant’ pick-up in underlying inflation and further recovery in the next several months (based on oil price dynamics) are likely to be re-iterated. At the same time, a lack of underlying price pressures (in spite of a marginal pick-up in December flash core HICP) is likely to be acknowledged. Firming of economic activity may be highlighted in the introductory statement, in line with the assessment of the Eurozone growth outlook in the December minutes.”                                                                   

“With no new actions expected, the focus on Thursday is likely to be on the Q&A.”