Eurozone: More easing likely in 2020

At its December monetary policy meeting – the first under new President Christine Lagarde – the ECB kept all policy rates unchanged with the deposit rate at -0.5% and confirmed the pace of monthly QE purchases at EUR20bn. While the ECB maintained its view that the balance of risks around the growth outlook remains tilted to the downside, Lagarde also highlighted that these had become less pronounced and that the growth slowdown shows some signs of stabilization. Nevertheless the ECB’s macroeconomic projections – which are largely aligned with ours – are far from pointing towards a swift rebound in economic momentum any time soon. In fact, until 2022 the ECB expects GDP growth to strengthen to only +1.4% while inflation will rise to 1.6% – a level that is still somewhat below the inflation target of close to 2% over the medium-term. This confirms our view that in 2020 the lackluster infla¬tion outlook will push the ECB to further ease policy. With political considerations around divisions in the Governing Council making an increase in monthly asset purchases less feasible, we expect a fur¬ther -0.1% cut in the deposit rate in H1 2020 while QE continues at the current pace until end-2020.