ECB preview: Too early to discuss tapering - Danske Bank

According to analysts from Danske Bank, despite the fact that inflation in the Eurozone is on target, is still too early to discuss any tapering to the European Central Bank (ECB) massive purchase program. The central bank Governing Council meets on Thursday. 

Key Quotes: 

“We expect the ECB to maintain its dovish stance at the meeting this week although inflation has reached the 2% target. The reason why we do not expect the ECB to react to the stronger inflation figure is that it is driven by the volatile energy and unprocessed food price inflation, whereas the underlying price pressure remains weak.”

“The ECB has said it will not change its monetary policy based on such a rise in inflation and in the introductory statement from the latest ECB meeting it was communicated that ‘the Governing Council will continue to look through changes in HICP inflation if judged to be transient and to have no implication for the medium-term outlook for price stability’.”

“We expect core inflation will have to exceed 1.0% for a number of months before the ECB will announce tapering of its QE purchases. This follows as executive board member Benoît Cæuré at the end of last year said ‘we are still waiting for signs that core inflation is on the rise and will clearly exceed 1%’. Our forecast for core inflation is it will be 0.9% on average this year and only go slightly above 1.0% at the very end of the year, implying the ECB, in our view, will not announce tapering of its purchases this year. We still believe the ECB will extend its QE purchases beyond December 2017.”

“From a market perspective, expectations are very low with a zero probability of a move in the deposit rate at the upcoming meeting. The market is pricing a 50% probability of a full 10bp hike in January next year, which in our view is premature.”