The European Central Bank, as widely expected, kept all its policy rates on hold yesterday. ECB President Mario Draghi reiterated that the QE purchases will continue until the end of March 2017 or “beyond, if necessary”. However, the central bank is likely to extend its purchase program after March 2017 as the ECB will not see inflation on a sustainable trajectory towards 2%, noted Danske Bank in a research report. Euro area’s inflation is expected to significantly accelerate from June 2016.
However, the contribution from energy prices is the main driver to inflation, and it does not matter if the oil price will follow the forecast or perform consistently with forward market as the support is expected to wane in the second quarter of 2017, said Danske Bank. Meanwhile, the ECB is unlikely to lower policy rates again.
Mario Draghi, yesterday, also argued that further easing of monetary policy from measures that are announced already will follow when they are executed. The central bank stated that corporate sector purchases will begin on 8 June, while the TLTRO-II operations’ first operation will begin on 22 June.
Meanwhile, the ECB revised its projections for 2016 inflation and growth. It slightly revised up the headline inflation forecast for 2016 to 0.2% from 0.1%. According to Draghi, inflation rates are expected to remain quite low or negative in the coming months before rebounding in H2 2016.
The ECB kept the projections for inflation in 2017 and 2018 unchanged at 1.3% and 1.6% respectively. This suggests that the central bank might revise its forecast upwards in September, mainly because of higher oil price. However, wage pressure in the currency bloc is expected to remain moderate for some time because of sluggish labor market. Moreover, a stronger euro will be a headwind for core inflation, according to Danske Bank.
