ECB likely to revise down inflation forecasts for 2016 and 2017

As expected, euro area's headline inflation for February decelerated into negative territory to -0.2% from January's +0.5%. However, the drop of 0.3 percentage points in core inflation to +0.7% was unexpected. It was slightly above the all time low of +0.6% that was recorded in January 2015. The decline in non-energy industrial goods prices, in particular, was surprising as 2015's modest rebound in core inflation was mainly driven by the tradable goods component that was helped by demand and currency factors.

"We expect the ECB to revise down its 2016 and 2017 inflation forecasts from +1.0% and +1.6% projected in December to +0.4% and +1.4%, respectively. This compares with our revised forecast that inflation is likely to average +0.1% this year and +1.0% next", says Barclays.

ECB President Draghi is likely to highlight that the central bank's revised inflation profile is bordered by threats on the downside since the recent declines in headline and core inflation are not expected to be included in the updated forecast outlook.

"Against this backdrop, we expect the ECB to ease monetary policy further by lowering the deposit rate by 10bp, removing the floor for the PSPP, changing QE composition possibly to include semi public debt and leaving the door open for future easing, including via additional deposit rate cuts and/or introducing a multi-tiered deposit scheme", says Barclays.

Recent indicators suggest that the current moderate economic rebound continues to be driven by domestic demand. Nevertheless, even if the private consumption outlook seems strong, recovery in investment might continue to lag, suggesting risks to expectation on the downside that  growth will improve +1.6% in 2016 and 1.8% in 2017.