ECB Preview: Eyes on the Staff’s Inflation Projections – ING
Carsten Brzeski, Chief Economist at ING, suggests that at tomorrow’s meeting all eyes should be on the ECB staff’s inflation projections, further details on the ECB’s corporate bond purchasing programme and Mario Draghi’s attempt to strike a fine balance between optimism and caution.
“Growth in the Eurozone in the first quarter was better than expected and the economy has finally returned to its pre-crisis level. Even though the second quarter should bring some technical slowdown as illustrated by the weakening of some confidence indicators, the overall outlook for the Eurozone has slightly improved.
On the other hand, however, political developments like Brexit fears and a rather general emergence of populist parties could easily limit the potential for upside surprises. In sum, we expect the ECB to stick to its very cautious take on the Eurozone economy.
Headline inflation is still close to zero but the recent increase in oil prices has given rise to speculations about a turning point in Eurozone headline inflation. Indeed, even though the latest spur came very probably after the cut-off date of the staff projections, higher oil prices should lead to the first upward revision of ECB staff’s inflation forecasts since the start of QE in early 2015.
While any increase in inflation forecasts on the back of higher oil prices is nothing more than a technical normality, it could give rise to speculations about the timing of any ECB tapering.
In our view, any kind of tapering speculations are more than premature. Let’s not forget that the ECB has not yet even started its corporate bond purchasing programme. Neither has it started the new round of TLTROs. Both will start in June.
The discussion on monetary policy and markets’ expectations about upcoming ECB action has shown signs of bipolar disorder over recent years. This is why the discussion can and will continue switching from helicopter money on the back of any growth concerns in one second to imminent ECB tightening on the back of somewhat better growth prospects and higher oil prices in the next second. It will be Mario Draghi’s task to treat this bipolar disorder with soothing words, carefully acknowledging the ongoing recovery but at the same time stressing continued high uncertainties and risks. In addition and to shield the Eurozone against any ‘unwarranted tightening of monetary conditions’, Draghi could also emphasise the long period of inflation undershooting and the ECB’s willingness to tolerate oil-driven overshooting of the inflation rate.”