Upward revisions to staff projections

With Italian stress on financial markets fading away, the ECB will be in a more comfortable situation to focus next week’s discussion on macro factors. The fact remains that the weaker euro and the surge in oil prices in recent months should lead to an upward revision of the ECB staff projections for inflation. Judging from Peter Praet’s comments, it also seems that the majority of the ECB considers the series of weaker hard macro data as a soft patch rather than the start of a downswing of the eurozone recovery. As observed earlier, Praet’s speech today provides further evidence that there is a growing majority within the governing council favouring an end of QE by the end of the year. Maybe an ironic outcome of the Italian market tensions is that the weaker euro is making it even easier to engage in QE tapering. However, we do not think that there is already agreement on the timing and detail of the communication. In our view, the main topics to be discussed next week will be:

When to communicate. Should the ECB present an explicit roadmap for next QE steps next week or should it wait until the end of July to get more and better information on the state of the eurozone recovery?

End date. Should the future path for QE be communicated with an upfront end-date or should it remain open for as long as possible, thereby creating more flexibility?

From thirty to zero. Should the period beyond September 2018 be a tapering period, reducing the monthly purchases gradually from €30 billion to zero or should there be another transitory period of a reduced pace?