3 Feb 2014
Flash: ECB to act? - BAML
FXStreet (Guatemala) - Team Bank of America Merrill Lynch expect no change from the ECB.
Key Quotes
"We expect no policy changes by the ECB, but risks for further easing in the near term have increased."
"Low inflation and funding market volatility justify a dovish tone and signal downward risk to rates."
"We see balanced market risks, depending on whether the ECB language will be dovish enough to offset inaction."
"As markets are quasi-pricing an ECB rate cut in the wake of weak January inflation, we still believe that further ECB easing depends on the timing and persistence of inflation weakness. In our view, the ECB will look through the latest inflation numbers because core inflation rebounded a notch, a large chunk of the downside surprise was energy (-1.2%) and services edged 0.1ppt to 1.1%."
"We expect the ECB to argue that the price softness remains temporary and does not jeopardize its inflation projections and to aim at being dovish to avoid a renewed spike in the exchange rate. Looking ahead, as long as inflation does not decline further, the ECB is likely to stand still. If inflation, especially core, weakens by 10bp or 20bp, the ECB would likely have to signal a rate cut, in our view."
"In what follows, we focus on what ECB Council Members have said recently that sheds light on their thinking and underpins our reasoning. We focus on ECB speeches on inflation, Eonia and liquidity, which strengthen our view that the ECB is not yet ready for action and needs an additional bout of inflation weakness to move."
Key Quotes
"We expect no policy changes by the ECB, but risks for further easing in the near term have increased."
"Low inflation and funding market volatility justify a dovish tone and signal downward risk to rates."
"We see balanced market risks, depending on whether the ECB language will be dovish enough to offset inaction."
"As markets are quasi-pricing an ECB rate cut in the wake of weak January inflation, we still believe that further ECB easing depends on the timing and persistence of inflation weakness. In our view, the ECB will look through the latest inflation numbers because core inflation rebounded a notch, a large chunk of the downside surprise was energy (-1.2%) and services edged 0.1ppt to 1.1%."
"We expect the ECB to argue that the price softness remains temporary and does not jeopardize its inflation projections and to aim at being dovish to avoid a renewed spike in the exchange rate. Looking ahead, as long as inflation does not decline further, the ECB is likely to stand still. If inflation, especially core, weakens by 10bp or 20bp, the ECB would likely have to signal a rate cut, in our view."
"In what follows, we focus on what ECB Council Members have said recently that sheds light on their thinking and underpins our reasoning. We focus on ECB speeches on inflation, Eonia and liquidity, which strengthen our view that the ECB is not yet ready for action and needs an additional bout of inflation weakness to move."