Forex Flash: ECB to leave rates unchanged on first signs of economic recovery – Merrill Lynch

Broadly supportive PMI releases for February as well as improving sentiment indicators released by the European Commission are first signs of economic recovery in the Eurozone, but that doesn't mean financial market stabilization. According to the ECB, the "M3 report suggests that credit creation is still very slow in the euro area, with SMEs still finding it hard to obtain credit", wrote Merrill Lynch analysts. "Overall, these data are consistent with our expectation of a moderate contraction (-0.2% qoq) in Q1 2012. Yet these data also confirm our view that divergence is on going across euro area countries", they added, pointing to surging retail sales in Germany in January by 3.1% mom/+2.4% yoy (and the strongest monthly gain in six years) while French consumer spending dropped by 0.8% mom/-0.2%.

Those first signs of economic recovery leave BofA Merrill Lynch analysts expecting no change in the ECB rate policy. "While this makes it possible in principle for the ECB to easy policy further, we would not expect it to change monetary policy as long as data show a stabilization in the deterioration in the economy and a slow recovery as the year goes by, in line with first hard data and our projections", they explained. However, bigger-than-expected inflation decline again over the next few months could trigger ECB action.