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Risks of dovish forward guidance in the March ECB Monetary Policy Meeting

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The European Central bank will be meeting for its monetary policy meeting later today. According to the economists polled, the central bank is expected to put its monetary policy unchanged with interest rates and the repo rates staying the same while also maintaining the QE purchases at a steady pace of 30 billion euro per month.

The QE program is expected to end in September this year. Amid earlier speculation that the European Central bank could be preparing the markets for hawkish forward guidance, the expectation for such an outcome has weakened.

This comes amid the January ECB meeting minutes that revealed that central bank officials were reluctant to tweak the language in its forward guidance amid inflation staying weak. The January minutes were in contrast to the December minutes where officials has discussed the possibility of making changes to the forward guidance in order to prepare the markets for an eventual tightening of monetary policy.

The hawkish minutes from December came at a time when the Eurozone economy was seen closing the year with a bang. The Eurozone GDP was seen surging at the fastest pace in nearly a decade while inflation was also seen rising at a strong pace.

The most recent inflation data revealed that inflation in the Eurozone had risen only 1.3% on the headline while core consumer prices were unchanged at 1.0%, after previously slipping to a rate of 0.9% annually.

Earlier in January, the ECB President Mario Draghi commented that the discussion on forward guidance had not yet started and that it would not start until the March meeting. Given the likely impact this has on the financial markets and considering the current state of inflation there is a very high chance that officials will leave forward guidance unchanged.

This is expected as inflation still remains fragile and any early hawkish comments could potentially cause a detrimental impact to the central bank’s QE policies. Furthermore, the recent appreciation in the euro currency’s exchange rate is further expected to dampen inflationary pressures.

At today’s monetary policy meeting, the ECB President is likely to play down any upcoming changes on forward guidance. Changing the tone of the central bank’s statement is expected to remain gradual and is expected to be in response to improving underlying inflationary pressures. This comes amid the lower scale of net asset purchases from the central bank and the limits imposed on how much of government bonds it can buy.

Making it complicated is also managing the market expectations. Officials have reiterated the fact that it was essential to stay patient and to remain prudent in its efforts to stoke inflation. It is quite possible that the central bank officials will maintain this line of thinking at today’s meeting.

While that being said, there is also a possibility for ECB officials to surprise the markets with a hawkish change to its forward guidance. However, much of the focus remains on the wording of the central bank’s forward guidance which will be open to interpretation.

Overall, today’s ECB monetary policy meeting is likely to be a non-event, especially with the markets focusing on the next big monetary policy meeting which comes from the U.S. Federal Reserve in a few weeks time.

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