ECB to still extend its QE purchases but at a slower pace in 2018 – Danske Bank

In view of Pernille Bomholdt Henneberg, Chief Analyst at Danske Bank, the ECB should still extend its QE purchases but they now expects a slower pace in 2018.

Key Quotes

“The higher service price inflation is clearly good news for the ECB, but given that much of the rise seems to be due to the early Easter last year and is not reflecting a rise in underlying price pressure, we stick to our view that the ECB will continue its QE purchases into 2018.”

“However, after having looked into the inflation details and revised our core inflation forecast slightly upwards, we now expect the ECB to reduce its purchases to EUR40bn per month starting from January 2018 and continuing for at least six months. In our view, it is still premature to discuss rate hikes from the ECB.”

“Ahead of the next ECB meeting in June, the inflation figure for May will be released, which will be crucial for whether the ECB will change its communication in a more hawkish direction and whether it will change its forward guidance. Draghi recently said that ‘before making any alterations to the components of our stance – interest rates, asset purchases and forward guidance – we still need to build sufficient confidence that inflation will indeed converge to our aim’. We expect a decline in core inflation to 1.0% in May but this is higher than seen recently and should support a more hawkish communication from the ECB at the meeting in June.”

“Following the April figure, we have revised our core inflation forecast up to 1.0% in 2017 from 0.9%, which is still a bit lower than the ECB’s forecast of 1.1%. In our view, the ECB is too optimistic on the wage outlook and we believe slack in the labour market, particularly in the periphery countries, will keep wage growth and core inflation subdued during this year. Additionally, the ECB’s projection that core inflation will exceed its historical average of 1.4% already next year, is in our view very optimistic and the ECB should eventually lower it.”