ECB to face significant challenge on monetary policy stance.
Having barely recovered from the Greek drama, the ECB is again faced with a significant challenge, this time to its monetary policy stance. With headline inflation still expected to rise in the near term and resilient forward-looking indicators, we expect the ECB to stay on hold at this meeting and an extension of the QE and TLTRO program in the spring of next year, also adding corporate bonds, says Societe Generale in a research note.
Although growth and inflation in the euro area have broadly developed as expected since June, the risks to the medium-term outlook for core inflation have increased sizeably with the weaker demand outlook in China and emerging markets. Since the ECB's June forecasts, GDP growth has broadly developed as expected, rising 0.3% qoq in Q2, while inflation stood at 0.2% in July, affected by renewed weakness in energy prices.
The ECB is likely to reduce its forecast for headline inflation in light of lower oil price assumptions, said Societe Generale. In June the ECB expected headline inflation to be 0.3% this year and 1.5% next", suspects . Whereas, Societe Generale estimates the headline inflation at 0.2% and 1.2% for 2015 and 2016 respectively.
On GDP growth, despite forward-looking indicators pointing to continued growth in H2, the ECB may reduce its forecast for next year in light of stronger headwinds from global demand, adds Societe Generale. 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.
