Taper timing: Lessons from the US – Deutsche Bank

A comparison of Europe today with the US around the taper talk in Q2-13 suggests that the unemployment gap is already consistent with taper talk, but core inflation (which is more relevant) is 0.3% too low, notes Research Team at Deutsche Bank.

Key Quotes

“The ECB staff is likely to lower its core inflation forecast, but the forecast will still imply that taper conditions will be met late in 2017.”

“Inflation has systematically surprised to the downside in recent years. However, for the first time since 2011, commodity prices are expected to experience significant positive base effects. Positive base effects in commodity prices could be supportive of inflation expectations as there is some evidence that the latter were negatively impacted by persistently low realised inflation.”

“Given the ECB’s mandate, intra-eurozone divergences are likely to limit the ability of the ECB to reduce its bond purchases, but not prevent it from trying.”

“The US precedent is consistent with a EUR 80bn (inflation not yet satisfying taper conditions), six months extension (inflation expected to meet taper conditions late in 2017) with additional flexibility provided by the reference to a “sustained” improvement in inflation (necessary given the persistent downside surprises to inflation in recent years).  Absent an external shock, the ECB is likely to cross its peak policy easing point.”