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Jacqui Douglas, chief European macro strategist at TD Securities, suggest that a primary driver of the ECB’s recent dovish stance has been the fall in professional forecasters’ inflation expectations, with the closely-watched long-term measure hitting a record-low in Q3.

Key Quotes

“The ECB will have the Q4 SPF data at next week’s meeting, with the data released publicly on Friday. We think the outcome could be a key driver of President Draghi’s tone during the press conference, much as it was in July.”

“The recent fall in inflation expectations has been difficult to explain. Our model of SPF expectations saw a record residual in Q3; the q/q decline was much larger than the usual factors like lagged inflation, oil prices, and FX, would suggest. The model improved a bit with a policy uncertainty index, but the residual is still very large.”

“Since the 2nd-largest residual was in 2012Q1, during peak EZ crisis, we suspect the model isn’t fully capturing factors like trade wars and Brexit risks, and the substantial downside risks that they present. Given that those factors persist, we look for SPF expectations to deteriorate a bit further in Q4, leaving Draghi sounding very cautious on inflation at his final press conference.”