Strong momentum but patient ECB – Deutsche Bank

Analysts at Deutsche Bank suggests that their central case scenario is a patient ECB as they expect that the ECB should be reassured by broadly unchanged financial conditions after their decision to slow the pace of QE.

Key Quotes

“The ECB won’t feel challenged by the recent data. Annualised euro-area growth in Q4 2016 could have been close to, if not above 2%. A broadbased improvement in industrial production in November reinforced the upbeat message from surveys. Indeed, SIREN-Momentum and SIREN-Surprise are in the top deciles of their respective readings over the past decade. It has been almost six years since both indices last were in their top deciles at the same time. That said, while the current macro momentum suggests upside risk relative to our (1.3%) and consensus (1.4%) GDP projections for this year, the ECB staff forecasts were already more optimistic in December (1.7%).”

“If current data trends continue, the outright taper decision could accelerate to June rather than September, but the latter is our baseline. The key is whether inflation, especially core, is becoming more likely to exceed ECB forecasts. Euro area headline inflation should rise sharply in January and February, to 1.6% and 1.8% yoy respectively. That said, mid-year is the earliest that the less convincing core inflation will satisfy the minimum conditions for policy tightening.”

“However, the ECB won’t be afraid to change plans, if necessary. If a "sustainable adjustment" in inflation is reached, we don't think the ECB would hesitate to act, even changing the current plan.”