Saturday, April 22, 2017

Euro Area Inflation Likely to Move Back Close to Target Rate, ECB Unlikely to Make Policy Changes in April

Data earlier this week showed that euro area’s headline and HICP inflation in March decelerated to 1.5 percent and 0.7 percent respectively from 2 percent and 0.9 percent in February. Even if there was a slight bounce in core inflation in April, the overall scenario for the core inflation continues to be weak. It is expected to average 1 percent in 2017 as labor market slack in the eurozone keeps domestic prices pressures under control, noted Barclays in a research report. The headline figure is likely to stay quite volatile due to the persistent unprocessed food inflation correction, swings in the energy base effect contribution, calendar effects and commodity prices.

“With all of these factors, we expect the headline HICP inflation to move back close to the ECB’s 2% target for April, supported by volatile core services and energy prices, before slowing down gradually”, noted Barclays.

Some of these effects might wane after the summer and the headline figure is expected to gradually decelerate and remain lower than 1.5 percent in 2018. Given the weak outlook for medium-term inflation, the ECB is unlikely to make any policy change during its meeting next week. This is mainly because the French presidential election will continue to be a critical risk for the currency bloc. This is likely to be resolved only in the second round on 7 May.

In any event, the ECB is expected to announce forward guidance during its June meeting and is likely to be less dovish that would open the door for depo rate hikes next year. In the beginning of 2018, the ECB is expected to reduce the monthly QE purchases to EUR 35-40 billion in the first half of 2018 and to EUR 15-20 in the second half.

“We also expect two 10bp hikes in the deposit rate, in Q2 18 and Q4 18, respectively. In other words, we expect both QE and negative deposit rates to still be in place in H2 2018, even if at less accommodative levels than in 2017”, added Barclays.

The material has been provided by InstaForex Company –

April 22, 2017 at 03:54AM