FXStreet (Barcelona) – Carsten Brzeski of ING, previews the ECB meeting scheduled for tomorrow, and further notes that the latest weakening of the Eurozone economy and still lacklustre credit developments should provide the ECB with enough ammunition to quell any tapering speculation, despite higher inflation and inflation forecasts.
Key Quotes
“In our view, latest developments may not be sufficient for the ECB to change its growth projections. New projections, which are also due to be released on Wednesday, should therefore, remain broadly unchanged.”
“In our view, however, market participants are likely to focus, not on the ECB’s growth forecast, but rather on inflation projections. In March, inflation was expected to come in at 0% in 2015, 1.5% in 2016 and 1.8% in 2017. Looking at the “external assumptions”, there could be a marginal upward revision in the 2015 and 2016 numbers. Even if the late- March lows are behind us, updating the euro exchange rate and oil price assumptions should push up headline inflation by c.0.1bp. For the 2017 forecast, these short-term fluctuations should not matter at all.”
“Could higher inflation forecasts jeopardise QE? This week and going forward, every upward revision of the ECB’s inflation projections is likely to draw market attention, as it will exert pressure on the ECB’s QE programme, or maybe even better, challenge the ECB’s justification of its QE programme.”
“Note that officially, QE had been justified as a tool to fight deflation. If and when this deflation threat is no longer reflected in a weak inflation outlook, speculation of a premature tapering could easily emerge. As a consequence, the ECB, at some point in time, will have to clarify the timeframe and conditionality of QE. The phrase “we intend to carry out our purchases at least until end- September 2016, and in any case until we see a sustained adjustment in the path of inflation…” will eventually need clarification. Which of the two conditions predominates: “at least until end-September 2016” or a higher inflation outlook?”
“In our view, the ECB has already started to prepare for this discussion by emphasising that it would not react to single indicators. Further down the road, a next step would be to downplay energy-price inflation. However, if the ECB is really committed to its balance sheet target and the September 2016 QE deadline, it might have to adopt a new argument, like the ‘output gap’ or ‘unemployment’.”
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