ECBs President Draghi further highlighted the “positive contagion” in financial markets and business confidence. At the same time, he made it clear that the ECB's monetary stance would remain accommodative as many downside risks remained. In particular, the Governing Council will monitor FX developments closely to assess the implications of a stronger EUR on activity and, importantly, on inflation.
- A more data- and EUR-sensitive ECB - A dovish shift likely in March, signalling a rate cut in Q2 - No major concern over liquidity conditions
Extract: Subtle verbal intervention
Near-term movements in the EUR will bear a greater importance than usual going into the March meeting. Upcoming economic data will be scrutinized as well to see if “positive contagion” finally reaches the economy, and so will political developments in Spain and Italy (including for their potential impact on the currency). Barring an accident, the updated staff forecasts to be published in March will likely reflect the slightly improving outlook for activity, although weak demand for credit and large cyclical differences across countries should prevent a much stronger recovery for now.
More importantly, inflation projections from the staff will be one crucial driver of near-term changes in monetary policy. [...]