• Eurozone inflation revised higher, but ECB still set for further policy easing in December
• Japan’s weak GDP growth, suggests further easing ahead
Eurozone inflation revised higher …
Eurozone HICP inflation for October was revised higher. The headline rate came in at 0.1% (flash estimate 0.0%), and up from -0.1% in September, while the core rate was revised to 1.1% (flash estimate 1.0%), up from 0.9% in September. Despite the upward revisions, inflation remains far from the ECB’s target. Inflation should move modestly higher over the coming months as the depressing impact from food and energy price inflation unwinds. However, it will likely remain well-below the ECB’s goal (close to but below 2%) for a long time.
… ECB still set for policy easing in December
In its September staff projections the ECB forecasts inflation to be 1.1% in 2016 and 1.7% in 2017, which is still somewhat below the ECB’s price stability goal. This means there is a risk of inflation expectations becoming dislodged if further downside risks to inflation materialize. We think, the unexpected slowdown in GDP growth in Q3 will probably have raised worries at the ECB about further declines in the outlook for inflation. The central bank will almost certainly deliver a stimulus package in December. We expect the ECB to increase the scale of its monthly QE programme by EUR 20bn per month and expand the eligible universe of assets. We also expect a 10bp reduction in the ECB’s deposit rate.
Japan’s weak GDP growth…
Japan’s economy remains weak and progress appears to have stalled recently. Preliminary third quarter annualized GDP growth was -0.8% down from -0.7% the previous quarter. Household spending has been volatile, while the corporate sector has been restrained, despite high corporate profits. Indeed, third quarter data showed that corporate demand was a drag for growth. Capital expenditure was weak and the contribution of inventories turned sharply negative. On top of this, the contribution of export growth remained lacklustre, after a sharp slowdown in Q2. The slowdown of growth in emerging markets and particularly that of China is affecting foreign demand.
… suggests further easing ahead
Although we expect GDP growth will likely turn positive in the fourth quarter on the back of a rebuilding of inventories, we continue to think that the BoJ will ease policy further in the first half of 2016 to give the economy, and particularly inflation an additional impulse. We don’t expect any changes in the next monetary policy meeting this week (November 18 and 19), since the BoJ may want to wait for the Fed to move before it decides for more easing. Moreover, it is likely that when an expansion of monetary stimulus is announced, that this will be done in the context of additional measures, including fiscal, to have a larger impact.