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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
The core CPI inflation continued to accelerate in October, up to a 5-year high of 0.9% YoY, from 0.7% in September. Nevertheless, we maintain our initial view that the BoJ will not be able to achieve the price target by the time it promised, i.e., by April 2015.
Yesterday's press conference did not change our expectation of more monetary easing in 2014, although when and how exactly the ECB delivers is still difficult to predict. An enhancement of forward guidance is likely, in our view, to come alongside a calibrated v-LTRO to reduce credit fragmentation. A (small) cut in the Refi rate cannot be ruled out if growth or inflation disappoints.
The ECB delivered a surprise 25bp cut in the Refi rate while keeping the deposit rate at 0%. The main fundamental justification for this early move was the risk of “a prolonged period of low inflation”, although the balance of risks to price stability was not formally shifted to the downside. December staff forecasts and the evolution of inflation expectations will be pivotal to assess the next ECB move, if any.
While the ECB left its easing bias and forward guidance framework unchanged in October, President Draghi was at pains to sound more dovish than last month. A rate cut was discussed, but the bar for action still looks fairly high for the Governing Council to deliver. There was no explicit hint at new liquidity measures coming soon beyond what Draghi already said to the European parliament.
On 25 September, the government presented its draft budget for 2014. The public deficit is expected to fall from 4.1% of GDP in 2013 to 3.6% in 2014. The government is aiming to reduce the ratio gradually in order to limit the adverse impact on activity, and it should reach 3% in 2015. The reduction will come from a structural effort equal to 0.9 points of GDP, or €18 billion.
The ECB maintained a clear easing bias at its September meeting despite improving economic data, which led to a modest upward revision to 2013 GDP forecasts by the staff. Dovish signals include the reiteration of the forward guidance; an unchanged staff projection for 2014 inflation; an unchanged balance of risks to growth; a stronger emphasis on structural headwinds, as well as the fact that the ECB did not completely rule out a rate cut.
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