We expect euro area inflation to turn negative again in September and forecast a rate of -0.2% y/y, down from 0.1% y/y in August . Our new forecast comes on the back of a downward revision to headline and core inflation in August, together with the latest fall in gasoline prices. Looking ahead, we still expect a sharp rise in inflation to 1.1% in January 2016 but this is driven mainly by base effects from energy prices and should be temporary. Overall, we now forecast inflation of 0.1% in 2015, rising to 1.1% in 2016.
The downward revision to inflation in August increases the pressure on the ECB . We expect the ECB to extend its QE purchases beyond September 2016 but believe it will stay on hold until December and possibly stick to verbal intervention until Q1 16. An announcement in December could follow if the growth outlook deteriorates, whereas a downward revision to the ECBs inflation projection could be trigger later on.
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