Eurozone: More confidence in the recovery - BBH

The Eurozone economy continues to expand at a steady pace of 0.4%-0.5% per quarter and the officials have more confidence in the recovery, points out analysis team at BBH.

Key Quotes

“The challenge for policymakers is not growth, but the absence of meaningful price pressures. The European Central Bank has a single mandate:  price stability, defined as near but below 2% CPI. The risk is that price pressures remain subdued owing to the past rise of the euro, the higher yields, and lower energy prices.”

“As the economic activity has evolved, the tail risks to both growth and prices have diminished. There is little risk that the euro-area economy will slip back into a recession. Although price pressures are not particularly robust, the risk of deflation has receded.”

“The ECB has signaled its intentions to do two things. First, it will continue with its complement of unorthodox measures, including buying 60 bln euros per month of assets (mostly government bonds) and the negative 40 basis point deposit rate through the end of the year. Second, the ECB also indicated that it does not want to stop the asset purchases abruptly.”

“The behavior of consumer prices in July and August will shape the next step in a very gradual process. Investors should give more weight to prices than real economic data in assessing the potential path for the ECB. We expect the ECB will announce that starting in January 2018, it will buy 30-40 bln euros of assets per month.”

“When the ECB announced the reduction from 80 bln euros to 60 bln euros, it extended the program for nine instead of six months. While hawks will likely push for a larger rather than smaller reduction, and a shorter rather than longer commitment, we suspect the choice is between a three- to six-month extension. Extrapolations from the Overnight Index Swaps (OIS) suggest the market expects the negative deposit rate will not be lifted until late next year at the earliest.”