The European Central Bank staff lowered inflation forecast today but according to analysts from Danske Bank it sill too optimistic and the central bank will have to extend the QE program beyond March 2017.

Key Quotes:

“The ECB updated its GDP growth and inflation projections, but the revisions were small. The ECB revised its headline inflation forecast higher only in 2016 (to 0.2% from 0.1%) and Draghi said “inflation rates are likely to remain very low or negative in the next few months before picking up in the second half of 2016”. The unchanged inflation forecast in 2017-18 (at 1.3% and 1.6%, respectively) implies, in our view, that the ECB could revise it higher again in September mainly due to a higher oil price.”

“The ECB lowered its core inflation forecast, but is in our view still too optimistic on this. We believe the wage pressure will stay modest for some time due to slack in the labour market, while the stronger effective euro will also be a headwind to core inflation.”

“ We still believe that the ECB will have to extend its QE purchases beyond March 2017 as the ECB in our view will not see inflation at a sustainable path towards 2%. We do look for a considerable rise in inflation starting from June this year, but the main driver is the contribution from energy prices and no matter whether the oil price follows our forecast or performs in line with the forward market, the support will fade in Q2 17. (We believe the ECB will refrain from cutting policy rates again.)”