For the last couple of months my ECB-ometer model has suggested a neutral policy stance was warranted by economic data and financial market developments (see here). The statement issued after last week’s ECB meeting retained a hawkish slant but, as the FT has reported, comments from officials this week have been more ambiguous and may indicate the balance of opinion on the Governing Council is shifting.

The ECB-ometer attempts to estimate the average interest rate recommendation of Governing Council members each month. A reading of above 12.5 basis points generates a forecast of a 25 bp rise in the ECB’s repo rate; below -12.5 bp predicts a quarter-point cut. The chart below shows the history of official interest rate changes and the model’s forecasts since the ECB’s inception .

Based on the latest information, the ECB-ometer’s forecast for the February ECB meeting is 0 bp, implying an exactly neutral policy stance. The ECB may be toning down its hawkishness but the model suggests economic news needs to change significantly to warrant hopes of a rate cut. As well as more evidence of a serious slowdown, Governing Council members are likely to require falls in money supply expansion and household inflation expectations before contemplating a dovish shift.

The recent small decline in the euro may indicate the market is sensing a turn in the Eurozone interest rate cycle but a sustained reversal against the dollar probably also requires investors to believe that the next cut in US official rates will be the last for some time.