Fiscal slippage
Fiscal slippage. It is not just the monetary policy stance we think the ECB hawks
will grow increasingly uncomfortable with in 2018. The euro area fiscal stance is
gradually easing, in absolute terms and especially relative to the fiscal rules.
With GDP growing above trend and the output gap closed, this fiscal stance will
be increasingly viewed as inappropriate.
Hawks vs doves. Two interconnected points have reinforced the notion recently
that the balance between the hawks and the doves is changing and challenging
dovish market pricing. First, Executive Board Member Benoit Coeure said
following the 26 October announcements that he hopes this is the last
announcement on QE. This contradicts Draghi’s comment at the last press
conference that a sudden end to QE is unlikely.
Second, Bloomberg reported
that Weidmann, Coeure and Villeroy (Banque de France Governor) wanted to
change forward guidance to make the overall monetary policy stance and not
just the QE stance conditional on inflation. If Weidmann already has the support
of the two French members of the Governing Council, the economic might of the
two core member states could prove increasingly influential over the policy
views of smaller member states.
EU Forecast
euf:ba18h:141/nws-01