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ECB Preview: Still Pressure From Low Inflation‏

ByDanske Markets
Published 01/08/2014, 02:26 AM
Updated 05/14/2017, 06:45 AM

The euro inflation has declined again and core inflation is at an all-time low. This adds pressure on the ECB to ease further, but we expect it to refrain from cutting rates at the meeting in January, even though it is likely to discuss a deposit cut.

Inflation expectations have continued its downward trend since the latest refi rate cut in November and as this is the main concern for the ECB we expect Mario Draghi to be dovish and signal that he is ready to act to ensure inflation expectations remain well anchored.

Looking ahead, deflation is not a prerequisite for more ECB action. If inflation stays below 1% for some time, it may be enough to entail further easing.

In our view, the ECB is likely to ease monetary policy further in April due to a new drop in inflation and core inflation.

This is a close call. While inflation will stay below 1% for some time, the growth outlook is expected to improve and in the periphery the widespread improvement in sentiment appears more robust.

If more action is needed, a deposit cut seems to be the preferred tool at the ECB, but as this measure has both advantages and disadvantages any hints on other measures should be followed closely.

We do not believe much is priced in for this week's meeting in terms of rate cuts or LTRO announcements. In our base case, Draghi will sound dovish and this should probably be enough to keep rates in check for the time being.

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