Fra BNP Paribas:
Contrary to what most analysts had been expecting, the ECB did not roll out its big guns yesterday, but opted instead for only a moderate extension of QE. Admittedly, we expect more steps next year because the core inflation rate is likely to defy ECB hopes of a rise. However, we do not expect the low inflation rate to be enough to convince a majority on the ECB Council to raise the monthly volume of bond purchases.
Nevertheless, the euro is likely to lose ground versus the dollar again. Lowest common denominator Like us, many analysts had interpreted ECB President Draghi’s statements over recent weeks as heralding another generous relaxation of the bank’s monetary stance. Most envisaged the ECB raising its monthly bond purchases. Instead, the bank opted for a somewhat more modest step:
The deposit rate has been cut from -0.2% to -0.3%, and the earliest end to bond purchases has been pushed back from September 2016 to March 2017. In addition, the ECB will reinvest the principal payments from maturing bonds, and in future will also buy bonds issued by regional authorities (see box on p.3). Our assumption is that Mario Draghi wanted to implement what he had hinted at, but could not raise a big enough majority to do so.
The ECB Council’s compromise is therefore a hotchpotch of minor measures that opponents of more extensive bond purchases could also accept. ECB still (too) upbeat about the economy … But what now? The main factors influencing yesterday’s decision against a bolder bond purchase programme will no doubt have been the sound euro zone economic data of recent months. Whilst economic growth remains weak against a backdrop of high unemployment, sentiment indicators have actually risen a little in recent months.
The ECB staff and the national central banks have certainly seen no reason to revise their growth forecasts for the next two years, which in our view are too optimistic. Instead, expectations for 2017 have even been raised slightly. And the core inflation forecast has also only been lowered marginally (see Table 1).
However, this does not mean that the ECB will not continue its loose monetary policy next year. We still regard the ECB’s forecasts as over-optimistic (see Chart 1, p. 3). In a number of euro zone countries, for example, relentless high private household and corporate debt levels will stand in the way of economic growth picking up as predicted by the ECB. And this is all the more true given that demand from the emerging markets seems likely to remain slow, and the tailwind from the weak euro and expensive oil seems set to ease over the course of next year. … and core inflation is in a rut With economic performance still lacklustre, there is no reason to think the ECB’s prediction of rising core inflation will come true. After all, as long as unemployment rates in many euro zone countries remain in double-digits – and this seems a reasonable assumption – there will be little by way of wage growth. While over the course of this year the weaker euro has given something of a boost to core inflation (excluding energy and food), to an increasing extent this will no doubt be balanced by lower oil prices impacting the prices of other goods. In other words, we envisage a core inflation rate next year below, rather than above, 1% which means that the ECB’s forecast of an average 1.3% in 2016 will be too high (see Chart 2).
