UBS House View Daily

Thought of the day

05.09 - ECB likely to hold off on taper talk

Ahead of the ECB’s meeting on September 7, markets have grown increasingly confident that policymakers are almost ready to start scaling back quantitative easing. The Eurozone economy is in a sweet spot, with consumer confidence close to record highs and Eurozone GDP growing at its fastest rate since the euro debt crisis.
But we expect the ECB to take a relatively dovish stance this week for three main reasons:

  • Euro strength delays when the ECB will likely hit its inflation target of below, but close to 2%. We expect the ECB’s latest staff projections to show inflation at around 1.4% in 2017 and 1.1% in 2018. The ECB has expressed concern at the euro's strength. The currency has also risen further since those forecasts were made.
  • We expect headline inflation (1.5% in August) to decline through the winter to below 1% on the back of energy-related base effects. Underlying inflation dynamics have some way to go to reach the ECB’s inflation target.
  • Recent negotiations in Germany and elsewhere are not pointing to a major acceleration in wage growth for 2018, which should also limit underlying inflation pressure.

So we expect ECB President Mario Draghi to communicate a relatively dovish stance to limit upside pressure on the euro and defer talk on tapering QE until the October meeting. This should reduce the likelihood of further euro appreciation, which helps earnings of corporates with international exposure and is positive for our overweight position on Eurozone stocks versus UK stocks.

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