Euro Area's headline CPI to stay below 1% till later next year

Recent global and financial developments, emanating particularly from China, combined with the relative tentativeness of the eurozone's economic upswing, have prompted ECB officials to emphasise that the QE programme will be expanded should economic and financial conditions warrant it. 

The ECB's staff projections had already revised down CPI inflation significantly to only 1.1% from 1.5% for 2016 and to 1.7% from 1.8% in 2017. There is concern that a weaker global economic outlook, a further fall in oil prices and the recent appreciation of the euro could add to downside risks to the already weaker inflation outlook in the near term. 

"Headline CPI inflation fell to only 0.1% in August and it could stay below 1% until later next year. Further, a significant degree of spare capacity persists which is expected to keep a lid on domestic price pressures. As such, the return of eurozone CPI to the 2% target ceiling is likely to take longer than previously anticipated and policymakers may deem that further stimulus measures are necessary", says Lloyds Bank.

Consequently, the ECB will examine closely developments in the global economy and the impact on the eurozone, in particular, with respect to the inflation outlook. Current economic indicators suggest that the recovery remains broadly intact, even if downside risks have risen. 

Business confidence has held up in recent months and there are signs that growth in domestic demand and intra-eurozone trade have helped to cushion weakerexternal demand. Further, our base case is that China's slowdown will be less severe than currently feared and eurozone growth could yet surprise on the upside relative to expectations.

"The short-dated German bund yields will stay anchored at low levels, with the 2-year yield staying in negative territory this year and likely for most, if not all, of 2016. The 10-year bund yield is targeted to edge up to 0.8% by the year end and to 1.2% by the end of 2016", forecasts Lloyds Bank.