ECB doesn’t want tighter conditions but Euro risks are more balanced - ANZ

Brian Martin, Head of Global Economics at ANZ, explains that they are of the view that the ECB will be very slow to change policy direction, given an absence of underlying inflation and wage pressures.

Key Quotes

“Other risk premia in the euro area are diminishing which are providing some underpinning to the euro amidst disappointment with US President Trump’s policy implementation.”

“The risk of a further upward squeeze in the euro can’t be ruled out, but policy makers will not want a sustained FX-led tightening in monetary conditions.”

“For the euro therefore, there are some positives in diminishing risk premia. In the short run, against a backdrop of disappointment with US policy implementation, these could provide the euro with some further upside impetus. Interest rates were last reduced over a year ago, and the economy has expanded with increasing signs that the upswing is broadening. The probability of rates moving lower again in this cycle is remote.”

“However, whilst we anticipate that forward guidance may be updated in the not too distant future, we do not expect the ECB to prematurely end its planned QE implementation of EUR60bn a month between AprilDecember 2017. Ultimately, the ECB’s mandate is to secure a recovery in inflation, and no evidence exists yet that the pick-up in headline inflation is self-sustaining or that wages are accelerating whilst core inflation is significantly below target.”

“Meanwhile, on some ECB estimates there could still be a significant output gap (4% or more of GDP). We therefore doubt that the ECB would welcome a sustained tightening in monetary conditions, even if led by the exchange rate, as that could pose risks to the improving economic climate. However, this does not preclude some temporary strengthening in the euro.”