ECB likely to move cautiously - HSBC

Analysts at HSBC suggest that with Eurozone inflation set to soften and the periphery economies still fragile, the ECB is likely to move cautiously.

Key Quotes

“On 26 October 2017, it should announce the "bulk" of its decision on the future of QE. In line with our long-held view, we expect an announcement of another six months of asset purchases at a reduced rate of EUR40bn per month (a EUR20bn reduction). We don't expect a full taper path to be announced in October as the ECB will want to retain some flexibility to respond to incoming data. From July next year, we expect a further three-month extension at EUR20bn per month and for net purchases to end in Q4 2018. We do not think rate rises will take place until 2019, with a deposit rate rise in March (by 15bps to -0.25%) and a 25bp main refinancing rate rise in Q3. One risk is that if growth continues to surprise positively, the chances of a 2018 rate hike would rise, particularly in light of the global tide of policy tightening.”

“In the autumn, fiscal policy might come to the fore as eurozone members submit their budgets to the European Commission. France and, in particular, Italy, might face tussles with Brussels.  If the Commission gets tough, this could force more austerity on these economies and heighten domestic political tensions.” 

“Risks

• A key upside risk is that the cyclical recovery still has some way to run. This could be the case if bullish sentiment among households and businesses spurs a virtuous cycle of domestic income, investment and productivity growth – or if the global economy surprises to the upside. Downside risks remain predominantly political in nature. If president Macron fails to implement meaningful labour market reforms, we may not see an acceleration in French growth in 2019. 
• Meanwhile the German election result demonstrated that populist sentiment is still strong across the continent.  Elections in Austria (15 October), Italy (by May 2018) and possibly Spain could deliver fragmented, unstable outcomes and/or renewed support for populism. Brexit negotiations will be ongoing and, while we think talks will have little effect on eurozone sentiment, a so-called “cliff-edge" Brexit could cause disruption. In terms of broader economic risks, global growth looks solid in the near term. And as major central banks (most notably the Fed) navigate the delicate path of policy normalisation, any bumps along the way could dent the eurozone recovery.”