Europe Economic Weekly

Bank of America Merrill Lynch - Sabado, 26 de Abril

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eyes on inflation: As we have argued before, April/May inflation and core inflation prints will be key, as any disappointment on the inflation front would increase hopes that the ECB may act. Yet this is not our central scenario: we expect euro-area inflation to rebound to 0.8%yoy in April from 0.5%yoy in March: the inflation volatility comes from the change in Easter timing and, indeed, we expect core inflation to rebound to 1.1%yoy in April, after 0.8%yoy in March. That said, risks are biased to the downside and lower-than-expected inflation in April (and/or any small but persistent exchange rate appreciation) could push the ECB into a small conventional sideways move (refi/deposit rate cut or non-sterilisation of SMP).

- Too weak a policy mix:
A case exists for ECB QE whatever the April inflation print, but the form of QE will matter; unlikely before late Q3 In our view, the ECB will resort to QE, not because it believes in a significant impact from expansion of its balance sheet on economic activity by itself, but to fight the risk of inflation staying too low for too long.
That said, the form of the ECB QE programme does matter: ideally it would be the purchase of bank loans, but, in practice, this seems unlikely and we believe the purchase of sovereign bonds will ultimately be necessary for large-scale asset purchases. In our view, the ECB is most likely to prefer selective purchases of private assets after the AQR for efficiency purposes, but it could be dragged into large-scale purchases of sovereign bonds if it wishes to fight the exchange rate, as well as impress markets.

- In this context, trend growth will not recover above 1pct:
Overall euro growth remains too dependent on a weak - but painful - fiscal adjustment and on vulnerable external demand; absent more voluntary policy action, we fear trend growth will still be at 1pct or below in 5 years time, when it was above 2pct before the crisis

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