BofAML_Europe Economic Weekly: ECB - “DESPACITO”

Redacción - Viernes, 01 de Septiembre

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Europe Economic Weekly: ECB - Despacito • Our ECB call remains unchanged: emphasis of FX risks and hints at committees being tasked, but no QE disclosure next week.•  The new set of forecasts may be difficult to communicate. We discuss the EUR effect and signals from our MCI index.
•   Credit impulse still weak, core inflation to move sideways in the next few months, French labour market reform on track.

ECB: keeping the QE decision for next time

Our ECB call remains unchanged. We don't expect a decision on the fate of QE to come next week. The tightening of monetary and financial conditions driven by the EUR probably makes the central bank more sensitive than usual to market perceptions of the policy differential to the Fed. We also stick to our view that the ECB will announce in October that QE will be extended by six months at EUR 40bn per month. We think the ECB will then decay monthly purchases to zero throughout 2H18. But the central bank likes to keep as much optionality as possible, so an announcement of the 'full exit strategy' appears unlikely, even in October.

New forecasts could become a communication challenge.

The EUR appreciation would justify a cut to inflation forecasts by 30-40bp in 2018 and 2019, and to growth forecasts by 20-30bps. In practice, the ECB is likely to deploy some discretion in their forecasts, especially for 2019, when we think they will refrain from taking the current 1.6% forecast - barely consistent with their target to start with - even lower. Some would argue that the Euro area so far has weathered the stronger currency, anyway, referring to August non-energy industrial goods inflation. But in our view, that is not true. It takes some time - at least six month - for the FX impact to show in goods prices. And the impact reaches full strength over a 1-2 year period. Core inflation is likely to move sideways in the next few months, we think - we discuss the latest August inflation print in our weekly view.

Credit impulse weak, French labour reforms on track

In our ECB preview, we also look into our monetary conditions indicator (MCI), a mix of rates and real effective exchange rate. It has tightened, emphasizing the importance ECB forward guidance ("low for longer"). Our MCI is not the only measure that has weakened. The 'credit impulse', too, remained at its second weakest in July since the start of QE (after June), standing at odds with more favourable signals from the 2Q Bank Lending Survey. We discuss this in our weekly view. Meanwhile, the French government has published its labour market reform decrees. Key elements like caps to severance payments, increased firm level flexibility, etc., are featured. It will take time to fully assess all the details, but that the government managed to stick to its self-imposed tight schedule is a strong signal.

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