LONDON, Jan. 9 (Xinhua) -- The European Central Bank (ECB)'s decision to leave interest rates on hold but to step up the verbal tone put it on "wait and see" mode, economists said Thursday.
The ECB's assessment of economic conditions remained unchanged despite the latest drop in headline inflation and the fall of core inflation to an all-time low.
The ECB kept the refi rate at 0.25 percent as expected and the deposit rate at 0 percent.
It still expects a gradual and weak recovery, with risks surrounding the economic outlook still on the downside, which is no change from the December meeting.
According to ECB President Mario Draghi, the latest inflation drop was mainly driven by statistical quirks. Risks to the inflation outlook remain balanced, with Draghi saying there were "limited upside risks and limited downside risks."
Matteo Cominetta, eurozone economist with HSBC Global Research, said, "The ECB is not currently considering immediate action."
Cominetta said the ECB's "wait-and-see mode" was spelled out quite clearly by Draghi with his reiteration of the fact that the ECB stands ready to act, but that it will do so in two specific circumstances that both entail deterioration from the current situation.
Cominetta said it appears that further significant monetary stimulus such as a Long-Term Refinancing Operation (LTRO) or outright asset purchases would require downside surprises to the ECB inflation outlook or persistently higher money market rates.
He added, "We remain of the view that the next policy measure could still be an LTRO which could be a response to market rates, should these not reverse any of their recent rise."
However, the ECB seems keen to make sure that any future LTRO is used to support the provision of credit to the real economy, said Cominetta. In his opinion, the fact clearly complicates the implementation of an LTRO and raises the bar for it to be launched.
Mark Wall, chief economist at Deutsche Bank, said Draghi had "stepped up the rhetoric" at the post-rate announcement press conference.
"The message was clearly one of heightened readiness to ease policy if necessary and the policy or policies that may be used are less constrained than the market thinks," he commented.
Wall said that Draghi's move was "a loud verbal intervention for markets -- it will be interpreted as QE being within the realm of possibility."
However, Wall said he continued to expect more modest policy moves first, with an easing toward the end of the first quarter 2014.
"But the probability of a more substantial policy like QE emerging further down the line is not zero and is rising," said Wall.
The ECB decision comes on the back of a continued improvement in economic sentiment.
The overall economic sentiment indicator (ESI) for the eurozone increased from 98.4 to 100.0 in December, the highest level since July 2011 and back in line with its long-term average.
The increase in the overall ESI was broadly-based across the components, with consumer, industrial, services, retail and construction confidence all improving, with the country breakdown revealing large increases in three of the most-troubled economies, Italy, Spain and Portugal.
The overall index is now consistent with eurozone GDP growth of about 0.3 percent quarter on quarter in Q4 2013, which is slightly higher than the average 0.2 percent growth seen in the previous two quarters.
Martin Van Vliet, eurozone economist with ING Bank, said, "This confirms that the economic recovery gathered some pace in the final three months of last year."
Given the low inflation environment, the ECB will also be relieved to see that both companies' selling-price expectations and consumers' price expectations picked up in December, said Van Vliet.