ECB: Pressure to taper but Draghi won't waver

Research Team at HSBC notes that the Eurozone inflation is rising sharply, and the hawks might start asking for an early tapering of QE but Mr Draghi made a shrewd move in December, announcing an extension of QE to at least end-2017 and with underlying inflation subdued, HSBC doubt the ECB will be bowing to pressure just yet.

Key Quotes

“In December, Eurozone inflation climbed to 1.1% y-o-y, the highest level in over three years. There is more to come, and we think Eurozone inflation could reach 1.8% by February (even higher in some countries, such as Germany). With growth picking up, some of the more hawkish members of the ECB Governing Council may start to call for tapering QE as early as the 19 January meeting.”

“However, the majority of the Governing Council remain worried about muted underlying price pressures, despite the rise in headline inflation. Core and services inflation remain around 1%. As noted recently by ECB board member Ives Mersch – typically at the more hawkish end of the spectrum within the ECB Governing Council – wage growth is still too weak in the Eurozone. The ECB will also be wary of tightening monetary policy too soon, repeating the mistake of 2011 when it hiked rates, helping to curb the fragile recovery.”

“Perhaps anticipating the hawkish calls, the ECB announced in December a nine-month extension of QE – albeit at a slower purchase pace – until the end of 2017. At that time, although the oil price had already increased significantly, it was not yet reflected in the ECB inflation forecast, meaning it still projected a meaningful undershoot of its "close to but below 2%" target.”

“All in all, we think that the ECB will be on hold in January, and indeed in the coming months, looking through the inflation peak in the first half of next year before having to make a decision on the possible future of QE. And given that we think underlying inflation will remain stubbornly low, in our view QE will continue at EUR60bn per month until the end of the year, and then at a slower pace (EUR40bn per month) from January 2018.”

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