ECB and breaking taboos post Brexit – Goldman Sachs

Research Team at Goldman Sachs, suggests that the negative growth spillovers of Brexit that their economists expect is a cumulative 0.5 percent over two years for Europe (compared with 2.75 percent for the UK).

Key Quotes

“This slowdown implies downside risks to our already low inflation projections and puts additional pressure on the ECB to step up the pace of monetary accommodation.

Our economists expect an extension of the asset purchase programme through 2018 and a shift away from the ECB’s capital key. The latter change could reduce market worries over Bund scarcity and, in our view, could lead to more EUR/$ weakness. That said, to be the catalyst for a resumption of the EUR downside trend, the change in the modalities of QE need to be delivered with the appropriate communication. President Draghi needs to guide the market to believe that the ECB, after failing to deliver on its inflation mandate for some years, will do “whatever it takes” to achieve it.

In our view, it is important to communicate that moving away from purchases based on capital key contributions breaks another “taboo” (as when the ECB pre-announced QE or brought the deposit rate to negative) and that the ECB could also take more unconventional measures if it needs to. To be clear, this is not what our European economists expect at the July meeting. But, if not in July, we remain confident that the ECB will rise to the challenge.”