ECB likely to lower deposit rate to -0.4%

The recently released account of the ECB's December policy meeting gave some idea regarding policy tools. According to the account, the ECB is concentrating on shifts in the medium-term inflation outlook, indicating that the central bank might eventually announce additional package of measures.

"We now expect a further 10bp deposit rate cut to -0.4% and another six-month extension of the QE program to September 2017", says JP Morgan.

There is likelihood for additional TLTROs. According to JP Morgan, an announcement might take place mostly in June. If the economic growth weakens, there is a possibility of a move in March. Moreover, the central bank is set to hold its second of its regular six-monthly reviews of the QE program in March that might see certain technical changes and take additional time in delaying an easing package till June.

The recent economic data continues to indicate towards weak growth in Q4 2015, but there have been moderate upside risk. However, additional weight will be on business surveys for the underlying pace of growth. The upcoming January flash PMI for the euro area will be an important data.  There has been an increase in uncertainty regarding the global economy; however, lower oil prices might start feeding through. Meanwhile, drivers of domestic growth continue to remain strong.

"We expect the PMI to remain unchanged in January, at the top end of the range it has been in since last April and consistent with 2% growth", says JP Morgan.