ECB likely to remain prudent and patient

We expect no new monetary policy decisions by the ECB at this Thursday’s meeting. One main consequence of the strengthening of the euro is the effect on monetary conditions in the Eurozone, which have become less accommodative.

With the appreciation of the euro – 2% since the beginning of the year – and higher bond yields, including in sovereign markets, monetary conditions are more restrictive. Eurozone core inflation stood at only 0.9% in December, and a stronger exchange rate depresses imported goods and services prices, affecting inflation negatively.

A lower inflation rate is contrary to the objective of the ECB and this is a main reason why the ECB is likely to continue with its asset purchases programme beyond September 2018. This will keep monetary policy very accommodative, a support for risk assets and prevent a further exchange rate appreciation, which hurts exports.

An interest rate rise this year is off the table, despite improving economic activity. Economic slack remains important and unemployment high. In sum, the ECB is likely to remain prudent and patient before making any significant changes to its monetary policy.

Gero Jung – Chief Economist – Mirabaud AM