expect 2018 GDP growth to reach 2.3%
Macro conditions. Economic growth is strong. We now expect 2018 GDP growth
to reach 2.3%, 0.5pp above the ECB’s September staff forecast. Our confidence
that the inflation normalization process is beginning is also building. The
production chain is tightening. Upstream prices are starting to rise, several
member states are reporting rising wages and inflation expectations are
showing signs of slowly moving upwards.
Modified Taylor Rule. We have modified the Taylor Rule for the specifics of the
euro area, for example, including medium-term inflation expectations and rate
spreads as well as a lower neutral real rate. The MTR says that policy rates
should be starting to rise already in 2017, not in mid-2019. If correct, it means
the monetary policy stance will become increasingly inappropriate. The way to
rationalise this against the policy stance is that the ECB is taking out insurance
against a relapse into disinflation.
EU Forecast
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