ECB Preview: No major changes or announcements are expected – RBC CM

According to the analysts at RBC Capital Markets, this week’s ECB meeting will be the second in succession to take place against a backdrop of rising inflation and strengthening growth but no major changes or announcements are expected.

Key Quotes

“Inflation has risen sharply since the turn of the year and the headline rate was in line with the ECB’s target at 2% y/y in February. Survey evidence suggests that the strengthening of growth seen in late 2016 has continued into the early months of this year.”

“Despite that, no major changes or announcements are expected from this week’s meeting. Our expectation is that it the ECB will remain on hold in coming months as it sees through the QE extension announced in December in full.”

“However, the monetary policy debate in Europe continues to evolve. As was the case in advance of the January meeting there are again calls for a change in the ECB’s stance. This time the focus is on the ECB’s forward guidance language on rates, which at present states: ‘[The Governing Council] expects interest rates to remain at present or lower levels for an extended period of time’.”

“As with earlier calls for the early tapering of purchases, we expect that those arguing for changes to the ECB’s language are likely to receive some push-back and our expectation is that the language on rates will be retained as is. Those members of the Governing Council arguing for no change can point to the continued weakness of core inflation as justification; core inflation has remained unchanged at 0.9% y/y even as the as the headline rate has risen in the last three months lending support to the argument that a meaningful pass through from the higher rate to core inflation has yet to materialise.”

“An updated set of staff projections will add weight to calls for change; we expect to revise inflation forecast up for 2017 and 2018 from December primarily due to revised oil price assumptions. In particular, they are likely to project inflation running at close to 2% for this year as a whole.”

“However, we think that it would require a couple of further months of headline inflation running at around 2% y/y coupled with evidence that core inflation is on an upward trend before changes to the guidance are forthcoming.”