ECB likely to keep policy rates on hold until second half of 2018, says Lloyds Bank

The European Central Bank (ECB) is expected to continue with its current pace of asset purchases until the end of the year. It is further likely to communicate a reduction in asset purchases in 2018 at the September meeting, potentially to an average monthly pace of EUR40 billion in H1, but policy rates are likely to be kept on hold until the second half of 2018, Lloyds Bank reported.

Eurozone annual headline CPI inflation was 1.9 percent in April, meeting the ECB’s goal of close to, but below, 2 percent. Nevertheless, policymakers remain unconvinced about its sustainability, as underlying domestic price pressures remain weak. The Eurozone unemployment rate has fallen steadily over the past four years but remains high at 9.5 percent. Wage growth, therefore, continues to be subdued.

Excluding food and energy, annual ‘core’ CPI inflation in April, at 1.2 percent, remains well below target. Overall, having flirted with deflation over the past couple of years, headline inflation is expected to average 1.8 percent this year and 1.6 percent in 2018.

The ECB has acknowledged that deflation risks have largely disappeared, but it is not yet convinced that inflation will be sustained at its goal of close to, but below, 2 percent without continued monetary policy stimulus.

"We anticipate the ECB will make further changes to its statement at the next meeting on June 8, when it is expected to upgrade its growth assessment towards a more balanced outlook. It is also likely to amend its current downward bias for interest rates towards a more neutral formulation," the report said.