ECB Unveils New, Higher Inflation Forecasts; Pushes Bund Yields Higher

While the rest of Draghi's presser was uneventful, the two things investors were looking for were the ECB's revised GDP and inflation forecasts. And while the first saw a modest improvement across the board relative to the September forecast as follows:

  • 2017 at 2.4% vs 2.2% In Sept.
  • 2018 at 2.3% vs 1.8%
  • 2019 at 1.9% vs 1.7%
  • 2020 at 1.7%, new forecast

It was the inflation projections that were more interesting especially after the Fed yesterday kept its own inflation forecasts unchanged despite tax reform.

Here is what Draghi unviled moments ago for the ECB's latest inflation expectations:

  • 2017: 1.5% vs 1.5% in Sept
  • 2018: 1.4% vs 1.2% prev
  • 2019: 1.5% vs 1.5% prev
  • 2020: 1.7%, new forecast

And Draghi's commentary:

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.5% in November, up from 1.4% in October. At the same time, measures of underlying inflation have moderated somewhat recently, in part owing to special factors. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to moderate in the coming months, mainly reflecting base effects in energy prices, before increasing again. Underlying inflation is expected to rise gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth.


This assessment is also broadly reflected in the December 2017 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5% in 2017, 1.4% in 2018, 1.5% in 2019 and 1.7% in 2020. Compared with the September 2017 ECB staff macroeconomic projections, the outlook for headline HICP inflation has been revised up, mainly reflecting higher oil and food prices.

Finally, this is how the ECB's revised inflation forecasts look visually, including the first 2020 inflation forecast:

Following the incrase in 2017 and 2019 inflation expectations, and the new - and quite high - 2020 inflation forecast of 1.7%, the EUR briefly moved higher, while 10Y yields pushed higher...

... although with Draghi repeating during the press conference Q&A that "inflation remains muted", we expect the kneejerk reaction to be quickly faded, and indeed the EUR is already retracing session lows.