MNI STATE OF PLAY: ECB Seen Unchanged Despite Covid 3rd Wave

Thursday's meeting of the European Central Bank's Governing Council is not expected to yield any changes to monetary policy, coming just weeks after the launch of a major recalibration of its tools and in spite of increases in Covid infection rates in some eurozone countries.

President Christine Lagarde will instead reiterate her confidence in December's eurosystem staff growth and inflation projections, which anticipated such developments. Some downside risks have also dissipated, notably thanks to the striking of a Brexit trade deal and the announcement in the U.S. of an additional fiscal support package.

There will be cautious optimism over the deployment of fiscal support at the national and supranational level, with positive knock-on effects for the effectiveness of monetary policy anticipated later in the year. Officials are also likely to refer to the gradual deployment of Covid vaccines.

FINANCIAL CONDITIONS

Emphasis will be placed on the necessity of maintaining favourable financial conditions, with the ECB standing ready to respond if the recent tightening reported in January's bank lending survey should become more entrenched.

Similarly, despite the material situation having changed little since December's meeting, there is likely to be a focus on the level of the euro and the central bank's willingness to intervene, via the communication channel in the first instance, should it pose a serious threat to the inflation outlook.

Interest may also focus on the ECB'S potential response to an uneven eurozone recovery and the possibility of an upside risk to inflation, as key factors such as energy prices, the eventual easing of social restrictions and the end of a German VAT cut become drivers rather than deflators.