FRANKFURT Jan 22 The European Central Bank appears content to sit on its hands in the hope recovery unfolds as neither of the red flags which could prompt it to act are waving vigorously enough to worry it.
Earlier this month, ECB President Mario Draghi stepped up his rhetoric, saying the central bank "strongly emphasised" its accommodative stance and would take "decisive action" if inflation undershoots or money market rates tighten in a way that tightens policy by stealth.
At the same time, he said the bank's policies were bearing fruit, with loose policy "finally finding its way through the economy" - an indication, some say, that the ECB hopes to wait this one out without major action.
As with Draghi's much vaunted and still-unused bond-buying programme, which did so much to underpin the euro zone when he announced it in 2012, the hope is that the threat of action will be sufficient.
The start of the year has certainly seen signs of confidence returning to the currency bloc.
Irish, Spanish and Italian five-year sovereign bond yields have all hit record lows this month and euro zone manufacturing grew in December at the fastest rate since mid-2011.
"In the absence of further deterioration of market and inflation conditions, hopes of actual further policy easing near-term may prove optimistic," G+ Economics' Lena Komileva said. "The bar to future policy action is probably higher than markets perceive."
Importantly, hawkish policymakers including Bundesbank President Jens Weidmann, have stuck to Draghi's script.
Consensus - often elusive in the past - makes the ECB's pledge more convincing, which in turn helps keep a lid on the euro exchange rate and dampens upward pressure on market interest rates.
Of the two factors potentially forcing the ECB's hand - inflation too low or market rates too high - the latter has received much more coverage. In the last quarter of 2013, inflation averaged only 0.8 percent, way below the ECB's target of just under 2 percent.
Draghi has spoken of a "danger zone" below 1 percent, where the cushion against disinflation is uncomfortably small.
At the same time, the ECB has rejected any suggestions that the euro zone would slip into a deflationary spiral as it sees gradual recovery and returning confidence boosting price growth back towards target.
A downgrade to ECB staff inflation forecasts, which will be reviewed in March, might not be enough for the ECB to act as the governing council's view might differ.
Economists agree with the ECB's assessment. In a recent Reuters poll, 37 of 44 economists saw a prolonged period of low inflation, but no deflation.
While Greece and Cyprus already have negative inflation rates and Portugal, Spain and Ireland are on the brink, gathering economic momentum in all three will lower the risk of persistently falling prices.
"What matters the most is that as long as the growth recovery remains on track, in the medium term core prices are unlikely to decouple from economic activity and enter dangerous territory," Unicredit economist Marco Valli said.
An unwarranted rise in market interest rates has become a more likely trigger for action. If all else is left equal, the ECB's policy stance will tighten gradually as banks pay back long-term loans.
The central bank could counter that by offering more cheap loans but policymakers have tempered such expectations. Money-market traders do not foresee the ECB flooding the markets for at least the next six months, a Reuters poll showed on Monday.
Later in the year, however, any nasty surprises from the ECB's bank stress tests could push it to pump cheap cash to the markets to ward off a credit crunch.
For now, the ECB seems to have no big issue with volatility in overnight rates, which have climbed to top the refi rate in recent days. The ECB said reduced liquidity makes interpreting money-market rates more complex, which in turn increases uncertainty about its pain threshold.
Moreover, whenever short-term rates have risen, banks have turned to the ECB for more funds, which has pushed them back down.
More profound is the argument is that banks paying back their ECB loans and market rates rising is a sign of returning confidence in the financial system.
"The benefits of this normalisation in terms of reduced fragmentation are much higher than the costs, so we don't see any reason for the ECB to act at the moment," Barclays Fixed Income Strategist Guiseppe Maraffino said. (Editing by Mike Peacock)