The European Central Bank is likely to keep its monetary policy on hold this week and not provide any hints of additional easing, said Danske Bank in a research report. After the easing measures were announced in March, the financing conditions rebounded, becoming a vital argument for the central bank to remain put.
ECB’s April meeting’s minutes evidently affirmed that the central bank is in the mode of implementation. The ECB stated that patience was required for measures to develop totally, and the focus had moved a very much to details of implementation of TLTRO-II and corporate bond purchases. The central bank stated that it is adding more accommodation next month, because of the first TLTRO II auction and the start of corporate bonds buying.
The central bank, during its meeting this week, will publish updated forecasts of inflation and growth. The ECB is likely to revise its 2016-2017 headline inflation upward because of higher food and oil prices; however, projection for core inflation is expected to be downwardly revised for the total forecast horizon. According to the ECB, core inflation will accelerate as the labor market rebounds. However, wage pressure is expected to remain moderate for certain period of time because of slack in labor market, while stronger euro will pose as a headwind, added Danske Bank.
Meanwhile, the ECB is expected to markedly revise down its inflation outlook for 2018. This is because the forward oil price has risen more in 2016 and 2017 than in 2018, suggesting the rate of inflation for energy prices is expected to be lower in 2018. The ECB will not welcome the lowering of inflation projection at the end of the forecast horizon; however, it is unlikely to set off additional dovish stance as the central bank is waiting for the impact of the deliver easing, according to Danske Bank.
Meanwhile, market projects zero possibility of deposit rate being lowered by 10bp during the upcoming meeting.
“We stick to our view that the ECB will remain side-lined in the global currency war and not cut policy rates further”, said Danske Bank.
However, the central bank is likely to extend its QE purchases beyond March 2017. Inflation is expected to begin accelerating from June 2016. But energy prices are the main contributor to inflation and even if oil prices perform consistently with the forward market, the support is expected to wane in the second quarter of 2017, according to Danske Bank.