Euro inflation fell to 0.5% in March, which is the lowest rate of inflation in more than four years. The ECB has said the decline was a surprise and has stepped up its dovish stance and now communicates that it is ready to use unconventional instruments “in order to cope effectively with risks of a too prolonged period of low inflation”. The message from the ECB is that a worsening of its outlook for price stability would warrant a monetary policy response, but it needs more information to assess whether this is the case. In light of this, future inflation remains very important.
We expect inflation to rise to 0.8% April, and although this might be lower than what the ECB expects, we do not think it is low enough for the ECB to conclude that its medium-term inflation outlook has changed. Thus, our main scenario is that the ECB will remain on hold in May.
In June, the ECB will publish new inflation projections and due to lower-than expected inflation in H1, we think it will lower its forecast. However, the lower inflation in 2014 will not necessarily lead to a change in the medium-term outlook for inflation and we think it is 50-50 whether the ECB will ease in June. The better growth outlook and a potentially higher growth forecast in 2014 makes more easing less likely.
Having said that, our forecast is that inflation will only increase slightly to 1.0% in Q4 compared to the ECB’s current projection, which is around 1.25% in Q4. Hence, if our forecast proves right, it will lead to another downward revision of the ECB’s inflation outlook. The continued process of the ECB lowering its inflation projection implies that it cannot be ruled out, that the ECB will eventually deliver in accordance with its easing bias.
We expect inflation to rise to 0.8% April, and although this might be lower than what the ECB expects, we do not think it is low enough for the ECB to conclude that its medium-term inflation outlook has changed. Thus, our main scenario is that the ECB will remain on hold in May.
In June, the ECB will publish new inflation projections and due to lower-than expected inflation in H1, we think it will lower its forecast. However, the lower inflation in 2014 will not necessarily lead to a change in the medium-term outlook for inflation and we think it is 50-50 whether the ECB will ease in June. The better growth outlook and a potentially higher growth forecast in 2014 makes more easing less likely.
Having said that, our forecast is that inflation will only increase slightly to 1.0% in Q4 compared to the ECB’s current projection, which is around 1.25% in Q4. Hence, if our forecast proves right, it will lead to another downward revision of the ECB’s inflation outlook. The continued process of the ECB lowering its inflation projection implies that it cannot be ruled out, that the ECB will eventually deliver in accordance with its easing bias.
Today, We will see the CPI Flash Estimate y/y (Change in the price of goods and services purchased by consumers) at 11 am Warsaw time.
regards,
oscarjp
No comments:
Post a Comment