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Europe Economic Weekly: The beginning of a long road & Global Economic weekly: Reloading for the next recession

Bank of America Merrill Lynch - Martes, 18 de Julio

Europe Economic Weekly: The beginning of a long road •  The ECB next week has to choose between "backtracking" and "assuming". We think they will choose the latter •  ECB will toughen language marginally removing the easing bias on QE, while insisting on the need for prudence and persistence • UK: we cut our inflation forecasts markedly as we think sterling effects will soon begin to fade.

The need to "assume Sintra"

After the "Sintra hiccup", the ECB for next week has to choose between "backtracking" and "assuming". We review the upcoming meeting in our Euro area section. We think they will choose the latter, and toughen their language marginally, by removing the easing bias on QE, while insisting on the need for prudence and a "persistent" monetary stimulus. Indeed, Sintra was not just about sending a hawkish message. It was also about expressing a healthy degree of unease at the pace of inflation normalisation and hinting at the fact that the end of QE did not mean a fast pace of normalisation in policy rates.

Our main point of focus now is the timeline. This has been our call for a while now but we think that waiting until October to disclose the quantum of buying in 2018 makes even more sense today. Indeed, financial conditions are already tightening, with in particular EURUSD already 5% above the assumed level in the June forecasts. The ECB should wait for the Fed decisions in September before making its own move.

Our ECB call remains: September pre-announcement of a decision on the future of QE in October. October announcement that QE will be scaled back from EUR 60bn to EUR 40bn for 6m starting in January 2018. Regular tapering to follow in 2H18, end of QE in December 2018 accompanied by a technical deposit rate hike.

The devil is in the detail

Meanwhile recent data in the Euro area is consistent with continued growth momentum in the Euro area. In fact, we now track 0.6% qoq GDP growth for 2Q, the same momentum as in 1Q and slightly above our forecast for the quarter. We remain cautious though. Some of the external signals are not consistent with continued momentum in the industrial sector. And this improved outlook is still not feeding fast into inflation. The June print, when core inflation surprised on the upside, was actually weaker than it looked at first sight. Just two temporary factors in France and Germany explain all of the surprise. We look at all this in detail in our weekly view.

UK: cut inflation forecasts, passthrough peaking

Finally, in our UK section we argue that Sterling has passed through consumer prices quicker than expected meaning less currency boost to inflation to come. Pipeline inflation pressures, which surged after sterling's fall, are fading. They tend to feed through to headline inflation with a lag of 6 months or so. That suggests the inflation downswing is close. We explain our supply chain inflation model in this note.

For CPI inflation we cut our 2017 forecast 10bp to 2.7% and 2018 60bp to 2.1%. We see inflation peaking in October at 3.0%, but next week's inflation release will have a key bearing on precisely where we see the inflation peak. We have 1.9% for 4Q 2018, 50bp below consensus.




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