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ECB’s tapering decision likely to take place in months ahead, may lower inflation forecast

The tapering decision of European Central Bank is likely to take place in the months ahead, noted Nordea Bank in a research report. The fragile inflation outlook is expected to postpone the decision until October, but the upcoming meeting is vital from the point of view of ECB communication.

The central bank is approaching the point when it has to make big decisions, stated Nordea Bank. It is usually assessed that even if inflation is still running below the ECB target, bond scarcity would compel it to lower the asset purchases further from the start of 2018. However, the ECB is expected to take another seven weeks to analyse the situation and not announce the next step until October, said Nordea Bank.

During the September meeting, the European Central Bank might begin preparing the audience for a tapering decision in a situation where the economic outlook is strong but the recent strengthening of the euro is going to cause a downside revision to the ECB staff projections on inflation. Therefore, even if the headline inflation surprised slightly on the upside today at 1.5 percent year-on-year and core inflation indicates signs of an upward trend, the ECB wants to keep its monetary policy stance very loose as long as possible in order to create conditions where inflation could reach target.

During its meeting the next week, the ECB is expected to revise down its inflation forecasts, noted Daiwa Capital Market Research. Currently its headline inflation forecast is at 1.3 percent year-on-year and core forecast is at 1.4 percent year-on-year.

The downward revision would possibly be due to the revised FX assumption that would support its updated projections. But, given strong domestic demand momentum as well as elevated levels of export orders, the ECB might well leave its more upbeat forecasts for 2019 little changed. Its first projections for 2020 appear likely to suggest that its inflation target of below but close to 2 percent would then be within reach, stated Daiwa Capital Market Research.

At 21:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at -4.19733, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -58.2855. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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