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Equities | Europe

European Central Bank to Ease Towards the Exit

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  • While the macro backdrop has been gaining momentum in Europe, Citi analysts believe that still low inflation is likely to see the ECB take baby steps towards monetary tightening.

     
  • Better growth but inflation still too low: Although above-trend growth and gradually rising inflation should increase the ECB's confidence that its accommodative policy bias is working, Citi analysts believe that asset purchases will need to be continued to avoid unwanted tightening of financial conditions.

 

  • Strong euro a concern, but should not stop exit: A stronger euro depresses import prices and curbs inflation. This may lead the ECB to cut its inflation forecasts in 2018 and 2019. 

 

  • At the September 7 meeting, Citi analysts expect the ECB to signal that it would continue to purchase assets beyond December. However, greater clarity is likely to come in October. Citi analysts believe that the ECB is likely to want to retain some flexibility over monthly purchases going into 2018.

 

 

  • Even with monetary policy stimulus fading at a gradual pace, Citi analysts remain positive on European equities given the improving earnings outlook and attractive dividend yield especially against European fixed income. Valuations are also attractive relative to the US and increasing inflows remain supportive of the market.

 

 

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