ECB Preview: Looking through inflation - Rabobank

Research Team at Rabobank notes that the inflation has risen sharply around the turn of the year but Draghi will likely fend off any questions by showing how this is mainly transitory and given its December commitment, Rabobank expects no change of tone from the GC until inflation becomes more durable.

Key Quotes

“Though the still weak inflation data and the uncertainty surrounding the 2017 political scene were the reasons for the ECB to prolong QE until year-end, a number of hawks has become uncomfortable with QE. We therefore believe that, if we don’t see any major upset in European politics and no new economic headwinds, the Council will not extend QE again.”

“Indeed, talk from various Governing Council members indicates that the December decision was a compromise between the hawks –the most hawkish members didn’t even want to extend at all– and the doves. While the doves may have been able to convince the hawks of the necessity to continue purchases (albeit at a slower pace) by pointing at these uncertainties in the economic outlook, this smoke will have largely cleared come December.”

“Therefore, we currently foresee that the Council (i.e. demanded by the hawks) will want to announce the start of a formal tapering path in December (recall, the April reduction will not be referred to as a taper step by the ECB). Our baseline scenario is for a tapering pace that will bring asset purchases down to zero by mid-2018 (at an average adjustment pace of EUR 10bn/month).”

“Of course, if this is part of the GC’s current plan, they will have to start sounding a bit more hawkish well-ahead of year-end. As explained above, we believe that there is currently no reason for the Council to do this yet and it would definitely need more tangible evidence that underlying inflation is not only moving in the desired direction but also to such an extent that the ECB would have to adjust its medium-term projection higher. However, if the GC doesn’t want to find itself in a similar position as last year –where extension was virtually the only option– that means that Draghi’s speeches will have to turn a bit more hawkish around the middle of this year.”