The European Central Bank is set to leave monetary policy on hold when it meets in Vienna on Thursday. That’s not the only thing that will remain steady: most economists expect the ECB to keep its 2016-2018 inflation forecasts unchanged from March. While that may suggest that ECB President Mario Draghi still has some work to do, it would mark the first time in a year that officials haven’t had to downgrade their outlook for consumer prices.
With oil prices LCOc1 almost doubling since early January, the ECB will nudge up its inflation projections, breaking a cycle of having to cut forecasts quarter after quarter, and supporting ECB President Mario Draghi's call for patience with measures already taken.
Indeed, corporate bond buys, announced in March, will only start in June, and the first allotment of ultra cheap loans is not due until later this month, indicating that more stimulus is already in the pipeline and supporting an argument by some policymakers for the ECB to stay on the sidelines at least until autumn.
The U.S. Federal Reserve's decision on a possible rate hike this summer and Britain's vote on membership in the European Union this month also raise uncertainty and support the case for a steady course.
Any core inflation cut would not trigger fresh ECB measures on Thursday but raises the likelihood that the ECB will eventually extend its asset buying scheme, which is set to run at least until March 2017.
"Our expectation is that the QE program will be extended to the end of 2017 and we think that an announcement could be made in September," JPMorgan economist Greg Fuzesi said.
"The medium-term inflation forecast remains low-ish, which creates the risk of an unanchoring of inflation expectations," Fuzesi said. "Ending quantitative easing in March would also cause an unwanted tightening in financial conditions."
Reference : Reuters, Bloomberg
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