Bancherul - BANCI / ENGLISH / ECB policy easing coming to an end

We are absolutely certain that the ECB will leave rates unchanged this month, said the analysts of Danske Research.

The economy appears to have stabilised, financial markets are doing better and, most importantly, the ECB has just launched 3Y LTROs totalling more than one trillion euro, so in Frankfurt they hardly see the need for further easing just now.

The focus will be on whether Mario Draghi keeps the door open for more 3Y LTROs. With so much liquidity in the system, we do not see much prospect of a new 3Y LTRO any time soon and, although the ECB never pre-commits, we think Draghi may signal that the February 3Y LTRO was probably the last one.

Markets may also focus on the quarterly staff forecasts. We might see small upward revisions to both the growth and inflation outlook, which further reduces the ECB's easing bias. Nevertheless, we expect Draghi to choose his words carefully as uncertainty remains elevated (the outcome of the Greek PSI is just one uncertainty).

Surging energy prices are beginning to push inflation upward. On previous occasions this has caused the ECB to hike rates. We believe that Draghi will abstain from this kneejerk reaction as he appears to put more emphasis on the view that price pressure should remain limited in an environment of subdued growth.

Market reaction is set to be moderate if the ECB keep rates unchanged and does not change its easing bias too much. If Draghi signals that the easing bias is gone due to improving growth prospects and increasing energy prices, we could see markets react with higher long rates and a EUR/USD strengthening.