Prudence is on the agenda at the ECB’s next meeting

Central Bank as a Helicopter Parent


Given the growing number of risks facing the EU – including slowing growth, rising US protectionism and upheaval in Italy – we expect caution from the ECB. Not only is it unlikely the central bank will detail the exit strategy for its extremely accommodative monetary policy, but QE may even be extended.

Key takeaways

  • Against a backdrop of weak growth and an unreliable rebound in inflation, the ECB is facing two key risks to its economic forecasts: US protectionism and Italian politics
  • Look for the ECB to express caution after its June meeting, but don’t expect any comments about the political situation in Italy at this stage
  • Our core scenario calls for the ECB’s QE program to be extended, with tapering continuing until December 2018

We expect the governing council of the European Central Bank (ECB) to adopt a more cautious tone at its next meeting. Recent economic indicators have confirmed that the euro zone’s growth slowdown continued in the second quarter, which is expected to be one of the weakest of the past two years.

Although inflation made an unexpected rebound in May (up 1.9% year-on-year, with core inflation of 1.3%), this rally was primarily attributable to the sharp rise in energy prices (up 6.1% in the past year). This will likely prompt the ECB – whose credibility has been battered in recent years by structurally low inflation – to keep these numbers in perspective.

Source: Bloomberg as of 31 May 2018.

Against this backdrop, we expect the ECB to acknowledge that the risks weighing on its economic forecasts have increased – particularly with the US adopting a more protectionist stance and with political risk making a spectacular resurgence in Italy.

The European Union is facing an extremely serious threat of a confrontation between the new Italian coalition government and the European authorities on the topic of fiscal discipline and compliance with community rules. The ECB is expected to refrain from making any comments at this stage, but if market trends jeopardise financial stability within the EU – which has not yet happened – investors will undoubtedly scrutinise the ECB’s reactions.

Given the ECB’s lower visibility on future events, it is probably too early for the central bank to detail the exit strategy for its ultra-accommodative monetary policy, despite the securities repurchase programme maturing in September this year. Our core scenario calls for the ECB’s quantitative easing program to be extended, with tapering continuing until December 2018. We also expect an initial hike in the deposit rate during the second half of 2019.


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Could the US dollar lose its reserve-currency status?



The US dollar has long been the currency of choice for banking and trade, and for valuing all other currencies. This has brought the US enormous economic benefits and significant structural downsides. Yet a shift away from the dollar may have begun, which could help the global economy in the long run.

Key takeaways

  • In years past, the denarii, ducat, guilder and pound each took a turn as the world’s reserve currency. Today, it’s the US dollar. Will the euro, renminbi or yen be next?
  • Central banks hold fewer US dollars than they did in 2004, and fewer international payments are being settled in dollars
  • If the dollar were to eventually lose its reserve status, its exchange rate could fall, US interest rates could suffer, and US equities and fixed income could potentially underperform