We now expect the ECB to raise its deposit rate in December of next year (by 10bp to -0.3%). We previously expected a September 2019 move. The change in view reflects dovish ECB communication as well as the likelihood that core inflation will undershoot the central bank’s forecasts.
Ostensibly, the ECB’s communication is consistent with a September 2019 hike. However, there have been signals from officials that it will come later. ECB President Draghi stressed that ‘through the summer’ was the minimum period that interest rates would be left on hold. In addition, Vitas Vasiliauskas – a centrist in the Governing Council – noted that ‘in this part of the world, summer means until the end of September’. Furthermore, he asserted that ‘from the current perspective, maybe we can think about the possibility to discuss further steps in autumn’. He then stressed that he had said ‘discuss’ a move in the autumn, rather than actually make a move by then.
Meanwhile, we expect core inflation to continue to undershoot ECB projections. We judge there is still significant slack in the labour market in the eurozone on aggregate, which should continue to dampen wage growth. (Nick Kounis & Aline Schuiling)