EUR: ECB To Stay On Course For Tapering Despite Drop

After core inflation had already reached  the highest since 2013, it fell back and even more than expected. This should not deter the ECB, says the team at ABN-AMRO:

Here is their view, courtesy of eFXnews:

ABN AMRO FX Strategy Research notes that Eurozone inflation dropped lower in May, as headline rate declined to 1.4%, down from 1.9% in April, while core rate (excluding food, energy, alcohol and tobacco ) dropped to 0.9%, down from 1.2% in April.

“The fact that core inflation has fallen back below 1% will probably be a set-back for the ECB. Still, in its recent communication the central bank has already shifted in the direction of putting more weight on economic growth as a lead indicator of core inflation than on the current trends in underlying inflation. Indeed, we think the robust level of economic growth and high PMI levels will likely push the ECB towards a gradual exit from unconventional policies,” ABN AMRO argues.

“We expect the ECB to taper its asset purchases from early next year and to hike its deposit rate in the second half of that year.  The first step in the exit process will come with a change in communication – in our view at next week’s governing council meeting. The forward guidance will likely become more neutral, dropping the explicit possibility of cutting rates or stepping up QE,” ABN AMRO adds.

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