ECB Preview: Too soon for a conversation on tapering – Deutsche Bank

Research Team at Deutsche Bank suggests that the ECB holds its next press conference on 9 March and it is too soon for a conversation on tapering and expects Mario Draghi to repeat the message that tapering is not under discussion.

Key Quotes

“Our baseline expectation remains unchanged. We expect tapering to be pre-announced in September 2017 and implemented from January 2018. This assumes that populist political shocks are avoided. Given the economic momentum, the risk is skewed towards a June taper announcement.”

“The press conference won’t be boring. We expect hints of a slow and gradual evolution to a less-dovish policy stance. This could come in different ways. First, we expect a less downbeat “balance of risks” (BOR) to the economy with a description of a firmer, broader and more resilient economy. Second, the Forward Guidance could be amended to remove the option of reducing policy rates further. Third, the ECB could remove “very” from the statement that “a very substantial degree of monetary accommodation is needed”.”

“This is likely to be counterbalanced to avoid an overreaction. First, we expect the continued absence of an explicit balance of risks to inflation, with the recovery in underlying inflation remaining “unclear” and wages “subdued”. Second, Draghi could say that the sustainable correction in inflation will be assessed over the rest of this year, indicating commitment to continuing QE until year-end; this would not preclude tapering from being pre-announced before year-end. Third, we expect a reinforcement of the ECB commitment to doing whatever is required within its mandate to reach its inflation goal, including reversing course on policy if necessary. The ECB has committed to re-accelerating QE if necessary. With the final TLTRO2 auction coming up this month, we believe the ECB will add that it is prepared to re-introduce TLTRO2 auctions if necessary too.”

“There are several things to watch in the updated ECB staff forecasts. First, 2017 GDP could be revised up to 1.8% from 1.7%. Second, headline inflation for 2017 should rise to 1.7% from 1.3% given what we have seen recently with non-core inflation (energy, food). Third, core inflation for 2017 at risk of being revised down to 1.0% from 1.1%. This would still be consistent with core inflation persistently above 1% in H2, opening the door to tapering. Fourth, we expect core inflation for 2019 to remain at 1.7%. A downward revision would be significant. Forward core at 1.7% was enough for the Council to agree the original closed-ended QE programme.”