ECB to reduce its 2016 GDP forecast?

In June the ECB expected headline inflation to be 0.3% this year and 1.5% next. On GDP growth, despite forward-looking indicators pointing to continued growth in H2, the ECB may reduce its forecast for next year, 1.9%, in light of stronger headwinds from global demand. 

"The outlook for household consumption should remain resilient, however. Risks are likely to remain on the downside due to China and emerging markets. In response, inflation expectations have again moved down significantly, raising questions over what the ECB can do", says Societe Generale.

The ECB may need to react if rising rates in the US spill over to Europe and/or a stronger euro leads to an unwarranted tightening of the monetary policy stance. This increases the risks that the ECB gets stuck with below-target inflation and weak growth, hurting its credibility. 

"The ECB thus needs to consider its options and whether to act pre-emptively. Longer-term, the ECB may consider a longer time frame for meeting the target or indeed a reformulated target, allowing for below (or above) 2% inflation even in the medium-term. In the absence of deeper reforms to the euro area economy, chasing the inflation target may just increase risks to financial stability", Societe Generale.