Eurozone: Inflation is moving up but growth deterioration may delay ECB next steps – Danske Bank

Analysts at Danske Bank, remain somewhat sceptical on the resilience of the ECB inflation outlook, as especially domestically generated price pressures remain muted.

Key Quotes:

“We remain somewhat sceptical on the resilience of the inflation outlook. Although headline inflation will remain close to 2% over the coming months, this is mainly due to energy prices. In light of our and markets expectation that oil prices will not rise further, the positive contribution from energy prices will abate from late 2018 onwards. At the same time, different measures of the underlying inflation pressures in the euro area still paint a somewhat mixed picture, with especially domestically generated price pressures still muted. A recent ECB publication, which looks at different measures of underlying inflation for the euro area, arrives at a similar conclusion. Hence, we expect the ECB to stick to its mantra and remain patient, prudent and persistent.”

“While ECB is more confident on the inflation dynamics, we also take note of the more downbeat assessment on the growth outlook, in particular in light of the recent protectionism/trade war risks. In a recent interview, Chief Economist Peter Praet indicated that the end of the APP by the end of the year is not a firm decision but subject to incoming data. The ECB’s ‘anticipation’ of ending QE could be derailed if data deteriorates markedly. We would expect the ECB to change stance should the growth outlook turn significantly sour from its 2.1% expected growth this year, to somewhat below the potential growth (estimated by EC around 1.5%).”