ECB to continue its QE purchases beyond September 2016

ECB president Mario Draghi was very dovish at today's ECB meeting and the ECB is now expected to extend QE purchases beyond September 2016. The ECB projects headline inflation will be only around 0.9% in Q2 16 and 1.2% in Q3 16 when the ECB is set to end QE purchases.

The ECB will continue its purchases if inflation is around these levels, as the ECB also forecasts inflation will increase to only 1.5% in Q4 16. While the ECB lowered its headline inflation projection for 2016 by 0.4pp to 1.1%, it kept its core inflation forecast for 2016 unchanged at 1.4%. 

"The ECB is too optimistic on its outlook for core inflation, as slack in the labour market will still be a headwind to higher wage growth in 2016. Hence, it is not very likely that core inflation will increase very close to its historical average of just below 1.5% as the ECB expects", says Danske Bank. 

The ECB will lower its core inflation forecast in December this year or in March next year, which would then be followed by another round of dovish comments from Draghi and eventually more easing.