ECB and Fed: peak divergence still lies ahead - BBH

According to analysts from Brown Brother Harriman, the peak divergence, between the European Central Bank and the Federal Reserve, still lies ahead using conservative assumptions for the US central bank. 

Key Quotes: 

“Within EMU, sustained inflation differentials are part of the changing competitive landscape. Lower inflation in Italy, for example, than Germany, is tantamount for an appreciation of the German euro and the depreciation of the Italian euro.”  

“The Federal Reserve could exit its QE, raise interest rates and allow its balance sheet to begin shrinking despite price pressures remain below target. This is because of the Fed's dual mandate. With unemployment (and growth) exceeding targets (full employment, trend growth) the Fed appeared willing to accept below target inflation.   
It is more difficult for the ECB with its single mandate to look past below target inflation.”

“Early last year, when headline CPI hit 2.0%, the ECB simply tapered its bond buying to 60 bln euros from 80 bln. It did not judge price pressures to be sustained. It is possible that even with a lower level of price pressures, it judges inflation to be more durable. However, the rhetorical flourishes needed, especially, if the weakness in the survey and sentiment indicators over the past three months is sustained and confirmed by real sector data.”

“Our concern is that by the time the ECB begins normalizing monetary policy, the economy would be past its peak. This will limit the pace and extent of the normalization process. It begins with the deposit rate at minus 40 bp.  Even if it begins to gradually hike beginning near the middle of 2019, how much above zero will rates get if growth returns to trend or lower? If make some conservative assumptions about Fed policy with two hikes in the remainder of this year and two next year, peak divergence still lies ahead.”