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ECB will ease monetary policy further on March 10

Tuesday, February 23, 2016

Downside risks, tightening of financial conditions and weak inflation dynamics

Updated: May 20, 2016

ECB account confirms focus on euro-area inflation · All Updates

Euro-area real GDP growth will be bu¬ffeted by external headwinds, but monetary policy will stay supportive

Source: Eurostat, ECB, Bloomberg, Oxford Analytica

Outlook

Euro-area growth failed to accelerate at end-2015, but confirmed that the recovery remains on track. Higher-frequency indicators available for the first quarter of 2016 suggest a continuing upswing in consumption, thanks to rising disposable incomes, the pass-through of monetary policy accommodation and neutral (or slightly expansionary) fiscal policy. Net trade will prove a drag on growth, due to cooling emerging markets.

The swing factor will be the outlook for inflation, which weakened significantly due to the latest fall in oil prices. The 2% inflation target will not be met even next year. Meanwhile, the lackluster recovery will drive up core inflation only mildly as the output gap gradually closes.

Impacts

  • Downside risks to the recovery may materialise if consumers save most of the income gains from lower oil prices.
  • The ECB will cut its deposit rate deeper into negative territory, likely by at least 10 basis points, and speed up asset purchases.
  • After its recent rebound, the euro should weaken again, as the ECB eases monetary policy further, possibly giving some boost to exports.

See also