• We think it is almost certain that the ECB will lower its inflation projection for 2014 and we also expect a slightly lower forecast for 2015, but in our view the ECB will keep its 2016 forecast unchanged at an already low rate of 1.5%.
• The lower inflation projection in 2014 should follow as inflation in H1 has disappointed compared to the ECB’s forecast. Moreover, the core inflation forecast looks optimistic and the strengthening of the currency also drags inflation down.
• The negative impact on inflation from the appreciation of the exchange rate currently looks to be even stronger in 2015, but higher global food prices put upward pressure on inflation, and we expect a modest lowering of the 2015 forecast.
• The ECB sees the strengthening of the exchange rate as an unwarranted tightening of its policy stance. It has communicated the response to this will be conventional measures and we expect a cut in both the refi and deposit rate, bringing the latter in negative territory.
• Draghi has said a worsening of the medium-term outlook for inflation will be tackled by a broad-based QE programme. In our view, an unchanged inflation projection in 2016 implies the ECB can abstain from doing QE.
• In upcoming papers we will consider the ECB members' latest communication and analyse likely instruments together with their market impact.
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