ECB to Leave Monetary Policy Unchanged, Focus Turns to Strategic Review

At the upcoming meeting, ECB members would likely acknowledge stabilization in the region’s economy, while reiterating accommodative monetary policy. The focus of the meeting would be the strategic review, the first assessment of the central bank’s monetary policy in two decades. We do not anticipate any change in the monetary policy – ECB is expected to leave the deposit rate unchanged at -0.5%. Meanwhile, the main refi rate and marginal lending rate also stay unchanged at 0% and 0.25%, respectively. The pace of the asset purchase program, effective on November 1, also stays at 20B euro per month.

Headline HICP for the 19-nation Eurozone rose to +1.3% y/y, highest since April, in December. Core CPI also steadied at about +1.3% for the month. While staying markedly below ECB’s target of +2%, the improvement in headline reading signaled stabilization the region’s economy.

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Real GDP expanded +0.23% q/q in 3Q19, up from +0.19% a quarter ago. The biggest contributor to growth was consumption.

Unemployment rate also dropped to 7.5% in 3Q19, lowest post-crisis level.

On the leading indicator, final composite PMI edged higher to 50.9 in December, compared with flash reading, and November’s final reading, of 50.6. The reading marks mild expansion in the economic outlook.

At the minutes for the December meeting, ECB took note of the tentative signs of stabilization in the manufacturing sector and mild spillover to the rest of the economy. The central bank reiterated the growth outlook “remained muted in the near term” and envisaged that a moderate recovery will materialize “later on”. It also suggested that economic outlook remained skewed to to the downside but “somewhat less pronounced”. We expect ECB will acknowledge that the economic data since the last meeting have shown stabilization. Yet, the members will remain cautious and indicate downside risk to growth.

As noted in the minutes, the present monetary policy stimulus “appeared fully appropriate, lending substantial support to growth and inflation developments. While vigilance on the efficacy of the policy measures and the appropriateness of the monetary policy stance was called for, it was highlighted that the measures should be given time to exert their full impact on the euro area economy”. We expect such view will be maintained at the upcoming meeting.

The strategic review will likely be announced at the meeting. While this would be lengthy exercise, we expect the market to be particularly interested in the revision of inflation target. There have been talks that the current inflation target as “below but close to 2%” can be revised in favor of a symmetric target. Recently, François Villeroy de Galhau, governor of the Banque de France and member of the ECB’s governing council, has just urged for such revision. As he suggested, the inflation target must be “symmetric”. If the “central target is seen as a ceiling, we have less a chance of meeting it”. As the review could last for a year, we do not expect immediate decision at the January meeting.