ECB preview: close to target…by 2020

At the 14 December meeting, attention will be focused on the ECB staff forecasts and any changes in communication on plans for unwinding QEs.

The main talking points ahead of the ECB’s last policy meeting this year on 14 December are the new staff projections for growth and inflation as well as forward guidance on asset purchases.

We expect higher oil prices to push ECB staff forecasts for inflation higher, to 1.4% in 2018 and 1.6% in 2019. A lower starting point for core inflation in 2017 should be partly offset by projections of further strengthening of GDP growth, which will be revised higher for the fifth consecutive quarter. The staff’s projections for inflation in 2020 will be published for the first time this week. We expect forecast for 2020 headline inflation forecast to be close to 1.8%, showing further convergence toward the ECB’s.

We expect no major communication change in the official statement or press conference. Our baseline scenario remains for the ECB to terminate QE by early 2019 and to deliver a first rate hike in Q3 2019, with risks tilted towards an earlier move. But the ECB will likely turn more hawkish well before that, introducing incremental adjustments to its communication in the course of 2018, starting with a ‘de-linking’ of QE and the inflation outlook.

But even if cyclical inflation surprises to the upside next year, we are not convinced that the ECB will be in a position to end asset purchases in September 2018 without risking unwarranted market tightening. Ending QE in September would also contradict Draghi’s pledge not to taper the programme abruptly – this is a commitment he could reiterate this week before leaving on a well-deserved Christmas break.

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