Both ECB and BOE Stayed on the Sideline

After two consecutive months of rate reduction, the ECB decided to leave the main refinancing rate at 1% at the January meeting. Policymakers would like gauge the impacts of previous rate cuts and liquidity provisions on the economy. Meanwhile, President Draghi indicated the 3-year LTRO has benefited banks and supported confidence. This is by no means an end of the easing cycle. Indeed, the ECB will likely lower interest rates further should economic conditions deteriorate.

Concerning the 3-year LTROs, the ECB stated they have been "providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence". While stating that all the measures announced in December should provide additional support to the economy, the central bank stressed that the non-standard monetary policy measures are temporary in nature.

On the macro front, policymakers acknowledged "substantial downside risks" to the economic outlook. The risks include "further intensification of the tensions" debt markets in the Eurozone and their "potential spillover" to real economy, slowdown in global economy, "protectionist pressures and the possibility of a disorderly correction of global imbalances". Recent drop in inflation rate was driven by the decline in energy and other commodity prices. It’s expected that consumer prices will stay above 2% in coming months before declining to below 2%. The ECB continued to believe the risks to the medium-term inflation outlook as "broadly balanced".

The BOE also stayed on the sideline in January, leaving the Bank rate unchanged at 0.5% and the asset-purchase program at 275B pound. Policymakers likely want to stay in a wait-and-see mode at the moment and gauge the impacts of previous measures on economic data. There is still one month to go for the current asset-purchase program. The end of the program coincides with the release of the February inflation Report. We expect some new measures will be announce at the meeting at that time as the UK economy has remained weak and inflation has eased from the peak.