ECB to focus on deflation, not politics

Data last week, including the drop in HICP inflation to -0.2%, heightened the risk of a prolonged bout of deflation in the single currency area. But on the face of it at least, the escalating political crisis in Greece and the forthcoming ruling by the European Court of Justice on the legality of ECB bond purchases presented potential obstacles to any future policy response.

We do not think that the ECJ or the Greek crisis will prevent the ECB from announcing full-blown quantitative easing on 22nd January. But both factors could contribute towards limiting the size and scope of the programme, implying a muted effect on the economy and financial markets.