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ECB:Lower Inflation To Keep Rates At Current Or Lower Levels For 2 Years

ByDanske Markets
Published 08/05/2013, 07:15 AM
Updated 05/14/2017, 06:45 AM
New research from Danske Bank Markets

According to ECB president Mario Draghi, 'the Governing Council expects rates to remain at present or lower levels for an extended period of time'. We project this period to be two years or more and forecast unchanged rates until late 2015.

An accommodative monetary policy remains much needed, as growth is set to be slow, unemployment remains high and we expect the output gap to stay large throughout our forecast period. Additionally, we believe monetary development will remain subdued.

The main reason why we expect the ECB to keep rates unchanged for the next two years is that we expect low euro area inflation extending into 2015. This gives the ECB the possibility of continuing to stimulate the economy.

We expect inflation in the euro area to continue declining until 2014, as wage pressure will be low, oil prices will decline, agricultural prices will increase at a slow pace and the effect of the previous year's tax hikes will drop out.

We estimate average inflation will come down to 1.2% in 2014, from 1.4% in 2013. This is below consensus and slightly below the ECB's projection, which expects inflation to be at 1.4% in 2013 and 1.3% in 2014.

Our forecast indicates that pressure on the ECB to cut interest rates further may materialise due to concerns about deflationary risks. Nevertheless, the risk of deflation remains low and we do not expect lower inflation to trigger a rate cut.

A traditional Taylor rule supports that we will not get further rate cuts. This follows as the expected improvement in the real economy will reduce the output gap, which will mitigate the effect of lower core inflation.

To Read the Entire Report Please Click on the pdf File Below.

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