After Unprecedented Stimulus, ECB is Set for Change of Focus

Preserving favorable financing conditions over the pandemic period. Those are the words from the European Central Bank that are likely to come to the fore over the next few months, as the Frankfurtbased organization changes tact after bolstering its 1.85 trillioneuro stimulus package in December. The ECBs Governing Council, led by President Christine Lagarde, will now likely pause for the foreseeable future and use this weeks meeting to steer markets in a new direction, as well as discussing the strength of the euro.

A more realistic objective, rather than aiming for 2 inflation two or three years ahead, is thus to focus on protecting favourable finance conditions, at the lowest cost possible while allowing a longer period for inflation to converge to target, said Anatoli Annenkov, a senior European economist at Societe Generale, in a research note. We thus see the ECB on hold for the near term, although growth expectations are weakening amid prolonged lockdowns.

Some market watchers believe this focus on financial conditions, effectively whether banks are lending to businesses and the real economy, may be a ploy so theres less of a spotlight on sovereign yields how much interest the euro zone governments are paying on their debts.

Inflation in the euro area is close, if not at, record lows and the ECBs December staff projections also notched a new low. On top of that comes the euros recent strength which is an additional drag on inflation. The single currency is…

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