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Viewpoint : Opening of the review of monetary policy strategy

Viewpoint : European Central Bank has officially announced the opening of the review of monetary policy strategy.

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Weekly Economic Monitor – 24 January 2020

Intesa Sanpaolo – Research Department

The process will focus on the definition of the price stability target, the tools with which to achieve it, and on the economic analysis underlying the decisions.

The conclusions should be announced in November

In the meantime, monetary policy has not changed, nor is it likely to in the coming months. All parameters were left unchanged: rates, APP purchases, forward guidance. The ECB is more confident that the baseline scenario will materialise as expected.

The experience of the SARS epidemic of 2003 suggests that the economic effects of the 2019-nCoV epidemic could be significant at the local level, but entirely transient.

Thanks to the containment measures put in place, in 2003 the economic effects of SARS on the Chinese economy ultimately emerged as having been greatly overestimated by forecasters.

The week’s market mover

In the euro area , a host of data releases are on this week’s agenda, most notably the advance estimates of 4Q 2019 GDP growth. GDP growth should be stable at 0.2% q/q in the eurozone and lose steam in France (to 0.2% q/q) and Italy (to zero).

The January round of confidence surveys is expected to show a widespread improvement (for the German Ifo, the EC’s economic sentiment index in the eurozone and for the Istat survey in Italy).

The flash estimates of January inflation should show a rise in the whole euro area and in Germany (to 1.4% and 1.9%, respectively), as opposed to a marginal drop in France (to 1.5%). Unemployment is seen stable in the eurozone and in Germany, while we do not rule out the jobless rate to rise back in Italy.

This week a number of data releases are lined up in the United States, although focus will be on the FOMC meeting. The Fed should confirm the rate pause, prepare a normalisation of liquidity management and signal that the debate on the monetary policy strategy and tools continues and should end towards mid-2020.

The first estimate of 4Q GDP should be of around 2% q/q ann., not far off the summer reading.

As regards December data, the goods’ trade balance deficit should widen, durable goods orders are expected to drop, new home sales, personal spending and income should be up at a moderate pace.

The core deflator is expected to remain subdued, below 2%. In January, consumer confidence is forecast to stay at high levels, in line with the average for the end of 2019.

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Source: BONDWorld