With this in mind, we anticipated further ECB easing measures at its March meeting. Consequently, the deposit rate was reduced by 10 basis points to -0.4%, and bond purchases were increased to €80bn a month from €60bn.
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.
Political risk: Prominent, but manageable
Political risk appears to be the main threat to the eurozone outlook in 2016. There are a few risk factors, such as the challenges of implementing the Greek financial support program, which may put pressure on eurozone assets at some point.
Political uncertainty in Spain and Portugal also stand out as potential sources of volatility.
The situation in Greece has calmed down over recent months, but is likely to be back in the headlines later in 2016. The main risk event, in our view, is the debt repayment to the ECB in July. Concerns about Greece’s ability to repay the debt and remain in the eurozone may prompt volatility in other peripheral markets, as happened during the summer of 2015.
That said, Greece is much less systemically important now than five years ago.