Credit Suisse and RBS expect ECB to increase QE in December

The European Central Bank might loosen monetary policy further, but the timing of the decision could be dictated by the value of the euro, analysts at Credit Suisse said.

“The euro is the key variable that will influence the timing and magnitude of the ECB's response through its impact on inflation,” Christel Aranda-Hassel said.

“We view EUR/USD 1.15 as a sensitive level. Strengthening above 1.15 and towards 1.20 could bring ECB action forward to the October meeting.”

However, analysts expected the ECB to make a move by December – extending the ‘horizon’ for its programme of quantitative easing by six months.

The central bank would also stick to its €60bn in monthly bond purchases and more forceful stimulus measures would require “a more significant deterioration in the outlook for inflation, in our view,” she added.

“In the event of the euro strengthening unduly and beyond EURUSD 1.20 if the Fed continues to drag its feet, the ECB's Draghi might have to backtrack on the claim that the interest rate floor was reached at -20bp.”

Alberto Gallo at RBS was of a similar view, although he indicated the catalyst would be a further deviation of inflation expectations from the ECB’s target.

“We continue to think that QE is most effective in buying time for policymakers to enact fiscal stimulus and structural reform,” he said.

As of 1408 BST the single currency was edging higher by 0.27% to reach 1.1360 versus the US dollar.