FXStreet (Delhi) – Research Team at Societe Generale, suggests that the decent start to year had put renewed pressure on the ECB.
Key Quotes
“Having pushed back the “activists” in December, the more cautious policymakers will now need to explain what the ECB could do as the inflation outlook weakens on the back of China and oil prices.
A further twist is added by the fact that China’s efforts to contain its effective exchange rate are likely to reduce the potential for a weaker euro. Based on our inflation outlook, we expect a dovish tone but little further ECB action this year (another 10bp deposit rate cut and an extension of the TLTRO in March), with the ECB betting on its past actions and an unchanged core inflation outlook.
Should the inflation outlook worsen, we would mainly expect further deposit rate cuts. If core inflation remain low, we would enter 2017 with growing expectations of QE for longer (we expect until end-2017), but also with growing concern over ever reaching the target.
There are three possible actions for the ECB in the medium term: 1) continuing QE, but new asset classes will likely be needed (corporate/bank bonds/equity?), 2) winding down QE and accept missing the target (but meeting its definition of price stability), blaming the lack of fiscal and structural policy support, or 3) changing its “aim” of “below, but close to, 2%” to provide for more flexibility in both directions.
We expect high hurdles to amass more and riskier assets on the balance sheet, especially in the important election year of 2017. In order to avoid more years with the same challenges, preparations for a plan B would thus need to start soon. In the press conference, we expect questions on the OMT following the German Constitutional Court’s decision to rehear the case on 16 February.”
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