MNI ECB PREVIEW - January 2021: ECB On Autopilot

ECB On Autopilot

For the full publication please see:

ECB Preview January 2021.pdf

The January ECB meeting will likely be a non-event given that the GC delivered a significant easing package in December. With staff macroeconomic projections also updated at the December meeting and few additional data inputs since then, there is little for the ECB to react to for now. While it is the case that lockdown measures have been tightened across Europe, the path of Covid-19 remains inherently uncertain, making it difficult to tailor monetary policy. The ECB will take time to assess incoming data in order to gauge the impact on economic conditions of the latest Covid setback. In any case, the December PEPP expansion gives the ECB a sufficient buffer to maintain favourable financing conditions in the coming months even if economic activity is dealt a further heavy blow.

With no material policy developments expected, the focus will instead be on the press conference. Front and centre will be questions about the impact of the latest Covid social restrictions on economic activity. It will be difficult to fully assess the damage at this stage, with President Lagarde instead likely to assert that risks are tilted to the downside and that the ECB stands ready to adjust all of its policy instruments if necessary. There are likely to be questions on recent political developments in Italy and the Netherlands, but as is customary the ECB will not be drawn into any specific discussion on these. The euro remains a hot topic for policymakers in light of the currency's lingering strength. However, the ECB is only like to reassert that it continues to monitor exchange rate developments and that it targets inflation, not the exchange rate. Given that the rally lost momentum since the beginning of the year, the ECB is under less pressure to try and talk down the euro.

Any questions on PEPP are likely to focus on the sufficiency of the latest envelope expansion/extension. Speculation about when the Federal Reserve will taper asset purchases, the tentative shift among European governments from pandemic spending to eventual fiscal consolidation, and noises from some in the ECB indicating that the new PEPP envelope should be viewed as a ceiling, all suggest that market attention will increasingly focus on the ECBs exit strategy.