Potential growth in the euro area is estimated to be much lower than the pre-crisis rate, implying the output gap will close quickly and the unemployment rate will continue to decline going forward.
The low potential growth rate is important for the ECB, as the implied narrowing of the output gap and the quickly declining unemployment rate could result in an upward pressure on wages within the next few years.
In our main scenario, the output gap will close in Q2 17, but assuming an even lower potential growth rate implies it can be closed already in Q4 16 - right after the ECB currently intends to halt its asset purchases.
For the output gap to remain negative for a longer period of time it requires a higher potential growth rate or a lower actual GDP growth rate.
We expect the ECB to fully implement its QE purchases but not continue the purchases after the end of September 2016. However, fixed income markets would be very sensitive to an expected tapering discussion at the end of this year.
The reason why we do not expect the ECB to halt its QE purchases before its current intention is that we expect this to require an increase in core inflation and we still believe the ECB is too optimistic on its outlook for core inflation.
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