We do not expect a hawkish stance from the ECB, although the latest economic survey indicators have strengthened further and inflation has risen above 1.0% for the first time in three years . President Mario Draghi will most likely argue that the ECB does not react to a single inflation figure, that the latest inflation gains are due primarily to energy prices and consistent with the ECB's inflation forecast - broadly in line with last week's comments from the hawkish executive board member Yves Mersch.
The higher inflation is good news for the ECB, but it seems clear that the underlying price pressure is most important and here there are 'no signs yet of a convincing upward trend' . ECB executive board member Benoît Cæuré said recently, 'we are still waiting for signs that core inflation is on the rise and will clearly exceed 1%'. We expect core inflation to stay below 1.0% for most of this year, while the ECB looks for a rise to 1.1% on average. See Highest Euro Area Inflation in Three Years - But the Underlying Price Pressure Remains Weak , 4 January 2017.
Although tapering speculation is likely to be boosted in coming months by rising inflation, the ECB has, in our view, sidelined itself until H2 with the latest QE extension . We expect headline inflation to rise temporarily above 1.5% but to come back below 1.3% and stay there in H2 17. Based on this, we expect the ECB to extend its EUR60bn monthly QE purchases into 2018. See Five Reasons the ECB Will Not Announce QE Tapering in 2017 , 4 January 2017.
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