Fabio Balboni, European Economist at HSBC, explains that the ECB had to revise down its inflation forecast again in its latest meet and seems concerned about the strong euro.

Key Quotes

“In line with our and market expectations, in September the ECB left all policy rates unchanged and did not announce any tweak to forward guidance (including leaving the easing bias to QE, ie. "we stand ready to increase our asset purchase programme in terms of size and/or duration") or make any announcement on the future of QE after December.”

“ECB Head Mario Draghi stressed that the recent volatility in the exchange rate is a source of uncertainty and requires further monitoring for its implications for monetary policy.”

“The ECB revised down slightly its inflation forecast by 0.1ppt in 2018 and 2019, to 1.2% and 1.5% respectively, in line with our expectations, due to the stronger euro.”

“Mr Draghi, however, noted that recently there had been a slight pick-up in underlying inflation measures and that he expected inflation to converge to target by 2020 (beyond the current forecast horizon).”

“The growth forecast was revised upwards for this year (from 1.9% to 2.2%) although it was left unchanged for 2018 and 2019 and the recent euro strength was included among the possible downside risks for the future growth outlook.” 

“Mr Draghi said a decision on QE after December will be taken in the autumn and that committees are working on the technicalities of the extension. But he also specified that the "bulk" of the decision is to be expected at the upcoming meeting on 26 October, unless any "serious risks" materialise, warranting a postponement to December.” 

“There was a preliminary discussion within the Governing Council on possible scenarios in terms of the size and duration of QE purchases from January, although no discussion took place on the sequencing between winding down QE and start hiking rates or changing the issuer limit.”


  • The updated growth and inflation forecasts set a rather dovish tone. As we had expected, the ECB revised down its inflation forecast again in light of the recent euro strength. It also revised down its wage growth forecast by 0.2ppt this year, and 0.1ppt in 2018 and 2019, with Mr Draghi reiterating some of the reasons why wages are continuing to lag behind the strength of the recovery.
  • True, there was an upward revision to this year's growth forecast, but the fact that the 2018 and 2019 forecast were left unchanged despite the stronger base suggests the quarterly growth rates might have been revised down slightly (although this does not show in the one decimal point forecast presented by the ECB). And in any case, Mr Draghi reiterated that the ECB's only mandate is price stability, unlike other central banks which have a dual mandate of growth and inflation. And even the recognition of the recent up-tick in underlying inflationary measures was balanced by the acknowledgment of a continued lack of "convincing" upside pressures.
  • On top of that, Mr Draghi reiterated loud and clear the concerns around the recent euro strength and its implications for the inflation outlook. All of this suggests to us that the ECB will continue to err on the side of caution, and leaves our view in terms of the future of monetary policy unchanged. The initial positive reaction by the exchange rate, with the euro breaking the 1.20 threshold against the USD, had partly unwound at the time of writing, but any possible further move up might contribute to make the ECB even more cautious. And in our view, despite today's downward revisions, the ECB is still too optimistic on future inflation and even more so on wage growth.
  • So we continue to expect a three-month extension of QE from January - albeit at a slower pace (EUR40bn per month) - and no announcement yet as to when asset purchases will go to zero. Mr Draghi said that the "bulk" of the decision should be announced at the October meeting, and we think that, unless unexpected events significantly change the outlook, it should include the size and duration of asset purchases after December. It might not, however, include some details such as the split between public sector and corporate bond purchases, or between sovereign and supranational purchases within the public sector purchase programme (PSPP). Mr Draghi also reinforced today that reinvestments are going to become "more and more sizeable" in the future, a message that we are certainly going to hear again at the time of any tapering announcement.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended content

Recommended content

Editors’ Picks

GBP/USD licks its wounds at record low amid pessimism over UK, risk-aversion

GBP/USD licks its wounds at record low amid pessimism over UK, risk-aversion

GBP/USD consolidates intraday losses around the recently flashed record low near 1.0340, as bears fear the BOE intervention. Hawkish Fedspeak, pessimism surrounding the UK economy and broad risk-aversion add strength to the bearish bias.


AUD/USD renews two-year low as bears poke four-month-old support around 0.6500

AUD/USD renews two-year low as bears poke four-month-old support around 0.6500

AUD/USD reverses the early Asian session corrective bounce on Monday as it drops back towards 0.6500. The Aussie pair pokes the support line of a 4.5-month-old descending trend channel. May 2020 low can lure sellers on defying the bearish channel formation.


EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD bears take a breather at the lowest levels since September 2002 amid early Monday morning in Asia. The major currency pair slumped the most in eight days on Friday while refreshing the multi-year low with the 0.9667 number.


Gold clings to 29-month bottom near $1,650, focus on Ukraine, Fed’s Powell

Gold clings to 29-month bottom near $1,650, focus on Ukraine, Fed’s Powell

Gold price licks its wounds at a two-year low, around $1,645 during Monday’s Asian session, as bears take a breather after the biggest daily fall in a week ahead of the key catalysts. Also testing the metal prices could be the mixed headlines surrounding Europe and Russia.

Gold News

Ethereum: Assessing the possibility of a post-Merge rally

Ethereum: Assessing the possibility of a post-Merge rally

Ethereum price trades at $1,323 on Sunday, several days after sliding to $1,200. It was a surprise that the largest smart contracts token would give up most of its gains during and after the much-publicized Merge.

Read more