ECB: Waiting for core inflation to accelerate – Nordea Markets

According to Jan von Gerich, Research Analyst at Nordea Markets, economic development in the Euro area has not caused any major surprises during the last months and does not require any changes to the ECB communications.

Key Quotes

“The stabilization of the service-sector PMIs signals that quarterly GDP growth continues at around 0.4-0.5% which is broadly in line with the ECB projections. While the high oil price has kept the Euro-area headline inflation hovering around and even slightly above the ECB’s target, the core inflation has been much slower to gain pace.”

“The recent negative surprises in core inflation have been partly due to temporary factors and there seems to be a wide consensus among the ECB Governing Council members that price pressures will gradually increase due to good economic development. One of the strongest arguments for that view is that wage increases are gaining pace in a number of the Euro- area countries. Thus, we do not see any possibility that the negative surprises in core inflation would change the ECB communication in this meeting or open any possibility for delays in ending the net asset purchases.”

“Apart from the possible pressure on Italian bonds, markets are likely to remain on wait and see mode until there are firmer signs of a core inflation uptick in the Euro area. Even after the heightened market pricing of ECB hikes we have witnessed during the autumn, we see further potential for more aggressive ECB pricing in a 1-2 year horizon and a stronger euro when inflation is firmly accelerating. However, the ECB is unlikely to surprise markets in October, as forward guidance remains clear and unchanged.”