ECB struck a dovish tone yesterday, lifting European and US markets. In light of heightened growth and inflation risks, ECB President Draghi signalled that more stimulus was in the offing and could be undertaken as early as at the March review.

Policymakers pointed to downside risks to Eurozone growth projections from global uncertainties and slower recovery amongst the EM economies, primarily China. The recent deterioration in financial markets also left them cautious of Eurozone's growth prospects.

ECB's primary concern was the recent oil price slump and its implications on inflation (and inflation expectations). Brent prices in EUR terms are down by nearly 30% since December. Financial metrics for inflationary expectations are heading towards record lows, offsetting any imported price pressures from a cheaper currency. Recent volatility has also lifted the euro/USD off lows. Beyond Dec's 0.2% YoY, inflation is now expected to remain at very low levels or negative levels this year before recovering modestly next year.

Therefore, the official staff projections due in Mar16 will be lowered. Inflation estimates had been trimmed down in December, pointing to low and below-target inflation at least over the next two/three years. 2016 forecast was cut to 1.0% from 1.1% and 2017 down to 1.6% from 1.7% previously. With 2018 estimates to be made available March onwards, these will be further lowered.

Odds of further policy action in March have sharply risen. However the mix of measures, that could include an increase in the quantum of asset purchases and/or another cut in the deposit facility rate, depends on the extent of financial markets' volatility by March and if growth forecasts are also lowered at the next meeting. Further deterioration in market conditions and heightened risks to growth/ inflation outlook is bound to see the ECB step-up policy stimulus.

"While more policy support is forthcoming, we are not optimistic on its material impact on inflation and inflation expectations", notes DBS Group Research

A sharp plunge in oil prices has increased the downside pressure on headline inflation, but the ECB has little impact on supply-side drivers. Core inflation by contrast was firmer at 0.9% in 4Q15 and off its trough. However the ECB can ill-afford to sit on its hands, despite risks of a muted impact.