ECB To Stay ‘On Message’

ECB expectations are firmly anchored to inaction on interest, deposit and marginal rates, yet outlying thoughts still look for a continued dovish stance from ECB President Mario Draghi and the board. Rates have been at current levels for the last 8-months, and only a small percentage of analysts surveyed believe we will see a cut this afternoon.

Recent hard and soft data point to a continued muted growth profile for the euro-area, for at least the first half of 2013. The most worrying part of recent releases isn’t just the anaemic output from member states, but the growing disparity between Germany and everyone else. Fourth-quarter Eurozone GDP figures announced at the start of the month confirmed a 0.6% contraction, marking the deepest quarterly downturn in nearly four years.

But it isn’t just growth showing a divergence. Unemployment levels across the continent have continued to rise, with the exception of Germany. Compared with January 2012, unemployment rose by 1.890 million in the EU27 and by 1.909 million in the euro area, according to Eurostat data. Unemployment across Italy is now running at 11.7% of the population, up from 11.3% in January, partly explaining the high turn-out of votes for the 5-Star Movement of Beppe Grillo.

Currently inflation levels do not appear to be a barrier to further ECB action. “If the ECB suggests in its policy statement that ‘inflation risks have shifted to the downside’, this would provide the code word for an April rate cut,” write economists at Morgan Stanley.

On the currency front, last month’s feverish chatter around the high level of the euro has dissipated and shouldn’t play a significant role in reporters questioning at tomorrow’s press conference. Growing speculation for more monetary easing has dampened the appeal of the single currency, which today trades at 1.3023 against the Dollar, just above the psychological level of 1.3000.

“Any use of words like ‘competitive devaluation’ or ‘currency war’ would indicate that the ECB is much more concerned about the euro appreciation than we expect,” said Marco Valli, an economist with Unicredit Milan.

Speaking at the end of last month, Mario Draghi said “at this point our monetary policy remains accommodative, because we are far from being in a situation where we can actually start having an exit in mind.” He also acknowledged that Eurozone inflation should be “significantly lower” than 2% in 2014.

So, all things considered, as with the central bank decisions already seen so far this week, we expect the ECB to stay ‘on message’; polls suggest only a 10% probability of a change to the main rate this month.