Due to weak bank lending survey, ECB should keep its policy unchanged and maintain the downside risk bias.
On ECB strategic review, we expect to gather some more information which could be either hawkish or dovish.
We expect no change in terms of ECB policy on January 23rd:
- The latest macro-economic figures point toward stabilization and forward looking sentiment indicators have improved over the last six weeks. We expect the ECB to acknowledge this but we think they would need more evidence before describing risks as “balanced” vs “skewed to the downside” currently, especially with latest lending survey which shows softening loan demand (index is negative for the first time since 2013);
- Inflation figures came broadly in line with previous market expectations, meaning that nothing new is to be expected on this front;
- Mrs. Lagarde will formally launch the ECB’s strategic review; at this stage, the scope is expected to be quite broad. We expect President Lagarde to give details on the organization of the review and to explain how external stakeholders such as academics and civil society may be involved. Please find below the potential topics that could affect financial markets:
- The ECB’s objective is currently only related to inflation; they might signal that this objective could be reviewed;
- They could shift to a symmetric inflation target => dovish;
- They could include owner occupied housing in an alternative measure of inflation => hawkish;
- They could include climate change in their review => hawkish:
- We expect the ECB to leave the tiering multiplier unchanged, but we do see potential increases in 2020.
We do not expect this meeting to have a material impact on financial markets.
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