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ECB Jan'20 Meeting preview - likely to be a non-event, watch for hawkish tone change
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The ECB meeting is not so much about policy as that seems set for the coming months. Instead, the focus is on the strategic review that is being launched. Most discussions are on how the price stability objective can be clarified. Currently, the target is expressed as "close to but below 2%." Surveys suggest there is a high expectation for a symmetrical inflation target, where equal weight would be given to too high as well as too low inflation, and more importantly, a period of undershooting could lead to greater willingness to accept an overshoot.

Although the meeting this week is not the time for an ECB policy shift, we see risks that the tone may start changing. The announcement of the policy review itself could be a flag for an eventual policy compromise. The ECB will also have to acknowledge the improving data, although from a very low basis, and fewer tail risks from trade policy and Brexit. Given green shoots in data and further upside to core inflation, a discussion about the risk balance shifting to "neutral" could start fairly soon. Combined with increasing emphasis on the need to monitor "side effects" from negative rates, the risk balance for this week is for a hawkish surprise. The risk of hawkish-leaning undertones at the ECB meeting supports our front-end steepener recommendations

ECB President Lagarde will likely sketch out the broad parameters of the review. It is bound to include a review of tools as well as communication. Decisions here may have far-reaching implications. While many press accounts make it seem as if negative interest rates have fallen out of a favor, for example, but Lagarde provided a spirited defense at her first ECB meeting. The central bank's balance sheet (Eurosystem) is within its mandate as are the targeted long-term refinancing operations (loans), but some evaluation of the relative merits is worth considering. Watch for any change in tone to hawkish from Lagarde during the press conference.

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