MNI ECB REVIEW - January 2021

For the full publication, please see:

ECB Review Jan 2021.pdf

As expected, the ECB left monetary policy unchanged at the January meeting, having already delivered a significant easing package in December. With staff macroeconomic projections also updated in December and little in the way of additional data to interpret, the ECB will remain on autopilot for the time being. Although President Lagarde indicated that the intensification of Covid social restrictions would weigh on growth during the first quarter, the conclusion of a Brexit deal, the recovery in the global manufacturing industry and the gradual roll out of national vaccination programmes have been a positive development. Nonetheless, the intensification of the coronavirus crisis and tightening of social restrictions result in the risks to the economic outlook being tilted to the downside.

Much of the focus during the press conference was on the flexibility of PEPP and the ECB's tolerance for euro strength. The statement on the flexibility of PEPP, in particular, gained the most attention:

"If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation. "

The inclusion of this passage in the initial statement was viewed hawkishly by the market. In fact, this was lifted from the December press conference statement and so does not provide any additional insight on the ECB's reaction function. Including this passage in the initial statement of the monetary policy decision likely reflects a desire to emphasise the importance of preserving favourable financing conditions, which will determine the evolution of PEPP. President Lagarde also reaffirmed that the ECB is carefully monitoring developments in the exchange rate, but there was a distinct lack of urgency which suggests that the euro has moved down the list of immediate concerns.