Starting from the latter half of 2019, the ECB’s Governing Council will probably have more room in its decision making than seen for some time and analysts at Nordea Markets think that the room will be used as a direction of higher rates due to two reasons.
Key Quotes
“First, the ECB’s reaction function has been de facto more hawkish than the official mandate would indicate.”
“In the second interpretation, the ECB is more concerned over inflation rates above 2% than rates below 2%”¦”. Thus, even if our inflation forecast remains below the official target of 2% at the end of 2020, we see that the gradual upward trend in inflation is enough for a majority of decision makers to start tightening the monetary policy.”
“Second, the ECB’s Executive Board will move towards a more hawkish (less dovish) stance next year. The terms will end in 2019 for the architectural trio of the ECB’s unconventional monetary policies: Draghi, Praet and Coeuré.”
“The new president and Executive Board could thus lead to a change in the ECB’s reaction function and higher rates.”
“In addition, we know that many ECB members see negative rates as part of unconventional stimulus, to which there is no longer a need, as illustrated by the decision to gradually end net asset purchases and by comments in the media.”
“As a result, we expect the policy rates to rise once in December 2019 and three times in 2020. We forecast that in 2020, economic growth in the US will weaken drastically and expect that weakness to feed through to the Euro area in the latter part of the same year. That would then force the ECB to pause the hikes in the latter part of 2020.”
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