We do not expect the European Central Bank (ECB) to change its monetary policy this week; by staying the course, the ECB will be able to confirm its engagement with bond markets and its long-term impact on them.
This strategy is being driven primarily by the weakness of underlying euro-zone inflation—which, at 0.9% according to the latest publications, remains far from the ECB's medium-term objective of 2%.
Furthermore, the positive growth dynamic evidenced by leading indicators is insufficient to change things significantly.
European job creation is too weak to drive wage increases and hence raise core inflation
In particular, job-creation numbers are too weak to generate any wage increases meaningful enough to sufficiently raise core inflation.
Against this backdrop, ECB President Mario Draghi's speech on January 19 must be seen in the light of the monetary-policy meeting that preceded it: We expect he will confirm the central bank's dovish bias and keep open the possibility of resorting to any and all options the situation might make necessary.
However, ECB policy is approaching its limits as time goes by. In our opinion, the threshold of holding more than 33% of a country's outstanding debt is one that the central bank will refuse to cross, but it is unlikely that 2017 will see the bank either taper or begin halting its asset-purchase program.