Monetary policy: Extremely loose and set to get looser
The sole policy objective of the ECB is to keep inflation at just below 2%. Currently, it forecasts inflation to be only at 1.6% by the end of 2017. This puts the ECB under considerable pressure to maintain an extremely loose policy framework in the hope of driving inflation closer to target.
With this in mind, we anticipate further ECB easing measures, starting with a cut to the deposit rate at its March meeting. Currently at -0.3%, we expect a further cut of at least 10, but more likely 20, basis points. We also see the current QE program being extended at some point this year, perhaps as early as the first quarter.
Inflation: Staying low, but above zero
The low inflation trend in Europe shows little sign of materially changing in 2016. Headline inflation is likely to dip below zero early in the year, due to the recent slide in oil prices. However, we believe it could rebound sharply by the end the year to around 1%, as the downward pressure from low energy prices diminishes. Overall, headline inflation will be volatile and very much influenced by oil price movements.
Meanwhile, we expect core inflation to rise at a very slow pace, increasing marginally to just above 1% year on year by the end of 2016.
Sovereign ratings: Showing an improving trend
Having overcome the acute stage of the crisis, euro sovereign ratings are beginning to improve. We expect the positive trend to continue in 2016, with economic growth supportive of credit metrics in the European countries. Despite more accommodative fiscal policies, headline fiscal numbers in most of the eurozone sovereigns continue to improve.
We expect ratings for Ireland and Slovenia to be upgraded by Moody’s, possibly in the first half of the year. We also see a high probability of Spain and Cyprus being upgraded at some point later in the year. Elsewhere, while France and Finland are experiencing deteriorating rating trends, we do not expect downgrades in 2016 – unless there is a large external shock.
