ECB Facing Growing Pressure to Clarify Its Intentions

2018/01/19
Franck Dixmier

Summary

Investors seem convinced that euro-zone rates will remain lower for longer than is realistic – which is why the ECB knows it must gradually shift expectations. At its 25 January meeting, we expect the bank to modify its forward guidance in an additional step towards normalization of its monetary policy.

For the first European Central Bank governing council meeting of 2018, many investors are expecting a change in the ECB’s forward guidance and a potential announcement about the end of its securities-purchase programme.

Over the past few weeks, some eminent ECB members – particularly Bundesbank President Jens Weidmann and board member Benoît Cœuré – have been pressuring the council to make a clear announcement about the end of the ECB’s purchase programme. They are joined by an increasing number of governing council members, who – according to the minutes of the latest meeting – favour a change in communication methods starting this year.

This last point is an important one, given its potential to influence the deep-rooted conviction among many investors that rates are set to remain lower for longer.

Until now, the ECB has justified its desire to maintain its securities-purchase programme by citing the fact that the inflation outlook remains below the bank’s medium-term target rate. Indeed, despite broad-based, steady and sustainable economic growth throughout the euro zone, the inflation outlook does appear to remain below the 2 per cent target. The issue is that against this backdrop, ECB comments that maintain a strong link between inflation and further QE simply strengthen the anchoring of long term rates at historically low levels, which could ultimately jeopardize financial stability.

As a result, at its 25 January meeting, the ECB will probably reiterate its planned sequence of monetary-policy normalization: discontinuing quantitative easing in a first step, followed by an increase in key rates at a later date.

For our part, we believe that rates are unlikely to be raised before 2019. The extreme sensitivity of the fixed-income markets to monetary-policy normalization was recently illustrated by the surge in US long-term yields and the ensuing market turbulence after the Bank of Japan announced plans to slightly reduce its bond purchases. Markets must clearly be prepared for hikes very gradually – which leads us to expect that the ECB will slowly clarify its communication policy over the first quarter.

In a broader context, the prospect of further divergence between European and US monetary policies during 2018 is growing increasingly clear. While the ECB is likely to leave its rates unchanged until 2019, we are expecting the Federal Reserve to raise rates three or four times this year. This would be a surprise to the markets, which currently anticipate only two hikes.



Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

375598

A Changing of the Guard at the Federal Reserve

2018/01/29
Franck Dixmier

Summary

The Fed isn’t expected to make major news during its 30-31 January meeting, but Franck Dixmier says this is still an interesting moment. Investors have finally priced in almost three rate hikes in 2018, and we will begin to learn where incoming Fed Chairman Jerome Powell stands on abandoning inflation targeting.