European Central Bank will exercise extreme caution in normalizing monetary policy, according to analysts, with the asset purchase program to run through the year with no announcement on what happens after that likely before the September meeting.
Citibank analysts write:
“The ECB Governing Council (GC) meeting on 8 June in Tallinn will be confronted with a clearly brighter economic outlook compared to the previous Staff Projections in March, but once again with the absence of firm signs of an inflation pick-up.
As a result, we expect the ECB to maintain its very gradual and cautious stance towards monetary policy normalization initiated last December with some modest scaling back of monthly asset purchases. Alongside leaving key policy rates unchanged, we think the Governing Council will introduce small tweaks to its communication language next week, remove the easing bias from its forward guidance on interest rates and upgrade the risks around the economic outlook to ‘balanced’. A further tweak in the forward guidance may involve shortening slightly the time lag between the end of the QE programme and the first rate hike (albeit with a greater likelihood of delivery in September).
We view such ECB moves reflecting diminishing deflation risks rather than signs of an imminent policy shift towards stimulus exit. We expect the asset purchase programme to run at the current €60bn/month until year-end, as pre-announced, and we do not anticipate any announcement on what happens beyond Dec-2017 before the September meeting. We still see the ECB continuing to buy bonds in 2018 by announcing a €150bn envelope, probably over a period of six months.”