While it has been widely anticipated that this week’s ECB meeting would be non-eventful, it is closely watched. We expect the central bank to reaffirm that the monthly asset purchases would be halved in size (from 30B euro to 15B euro) from October to December. There is chance that the reinvestment plan thereafter would be revealed. The policy rates would certainly stay unchanged, with the central bank reiterating that they would stay at exceptionally low level for an extended period of time.
Since the June meeting, economic growth, inflation and the job market have developed in line with expectations. However, wage growth and inflation have remained soft. As such, we expect the staff to slightly downgrade the inflation projections. While President Mario Draghi could talk about geopolitical uncertainties in Turkey and Italy, as well as escalation of global trade tensions, the happenings so far are not material enough to affect ECB’s policy stance.
Second estimated of 2Q18 GDP was confirmed at +2.1% y/y, slightly lower than consensus of, and first quarter’s, +2.2%. On inflation, headline CPI (HICP) eased to +2% y/y in August, easing from consensus of, and July’s, +2.1%. Core inflation slowed to +1% y/y, down from +1.1% as the market anticipated. On the job market, the unemployment rate stayed unchanged at 8.2% in July. Labour cost jumped to+2% y/y in 1Q18.
Despite being the strongest growth since 4Q12, this would not be sufficient to transmit to inflation, as the boost on domestic consumption is limited. Headline inflation was mainly driven by energy and food prices, and underlying inflation remained soft. Growth in wage is yet to meaningfully pass to the general price level. These could lead the economic staff to revise marginally lower their inflation forecasts for 2018 and 2019.
In June, ECB announced a dovish tapering plan: Reducing the size of its asset purchase program from 30B euro to 15B euro in the three months through December 2018. While the purchase program would end afterwards, the principal payments from maturing securities purchased under the program would be reinvested “for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation”. ECB would reaffirm this plan at the upcoming meeting. It is also possible for the central bank reveal more details about the reinvestment plan.
ECB’s policy rates have stayed unchanged since 2016 as will be maintained for some time after the end of the asset purchase program. We expect ECB would reiterate the forward guidance that the interest rates would “remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term”.