ECB: Greater reliance on forward guidance? – BBH

Analysts at BBH thought the market read the record of last month's ECB meeting too hawkishly and the meeting was held prior to the news of the disappointing December CPI.  

Key Quotes

“With the ECB's purchase plan decided last year through September 2018, it naturally stood to reason that there would be greater reliance on forward guidance to help shape investor expectations.  That does not mean that there will be a change next week.”

“The ECB’s information set has not changed significantly since last month, and the staff will not update its forecasts until March.  The price of oil is higher, which will, if sustained, boost headline CPI.  It will be blunted in part by the rise of the euro.  The euro's appreciation will have a larger impact on the core measure.  Although the ECB does not target it, core inflation appears to be part of the operational definition officials are using to help determine whether consumer inflation is on a durable and self-sustaining path toward the target.”  

“Draghi may also remind the market of the sequencing that has already been agreed upon.  The asset purchases will continue through September, though they may continue depending on the evolution of price pressures.  Sometime after the purchases are complete, then rates will be increased gradually.  The hawkish elements want a firm endpoint to the purchases, but they do not appear to have the votes in this still-collegiate body.  As we have noted before, the purchases are linked to inflation, and a pre-determined end-date commitment would violate this principle.  It would shift the ECB policy from data-dependent to date-dependent.  If that were to transpire, against our expectations, we expect it would send the euro sharply higher.”