Multiple Factors Hint at Continued Status Quo from ECB

2018/04/23

Summary

Even though the ECB’s monetary policy has been very accommodative, its plans for dialling it back have been quite conservative. We don’t expect this will change at the central bank’s next meeting. QE will eventually end and short-term rates will eventually rise – but not yet.

We expect the European Central Bank (ECB) to make no changes to its monetary policy or forward guidance at its next meeting, on 26 April.

We see several reasons for the status quo to be maintained. The latest economic figures and business surveys out of the European Union (EU) have been less optimistic than those released early in the year. In addition, the euro-zone’s headline inflation is moderate (up 1.4 per cent year-on-year in March) and core inflation has been holding at low levels (1 per cent in March for the third consecutive month). All told, these factors should reinforce the ECB’s conservative approach to the gradual normalization of its monetary policy.

In addition, there are growing concerns over the uncertainty wrought by the United States’ increasingly protectionist tendencies. Benoît Coeuré, a member of the ECB’s Executive Board, recently stressed the potentially negative impact of US protectionism on long-term global growth. This is yet another sign that the ECB is less likely to make changes at this juncture.

The ECB has, however, recently discussed when it could make changes to its policy. The March committee minutes showed that the ECB would use three criteria – convergence, confidence and resilience – to decide when to terminate its quantitative-easing (QE) programme:

  • Headline inflation that is converging towards the central bank’s medium-term target of 2 per cent.
  • Confidence that EU’s inflation trajectory is on track to reach this target.
  • The resilience of inflation following the end of QE.

While the ECB’s latest inflation forecast of 1.7 per cent by 2020 is consistent with its desired target, its ability to have confidence in inflation’s trajectory is no doubt the most problematic of these three criteria. The central bank’s forward guidance is therefore likely to focus on the third point: resilience.

No matter what, QE will inevitably come to an end. As a result, we expect the ECB will use its next few meetings to underline the positive impact of reinvesting the principal from its bond purchases. We also expect the central bank will emphasize its willingness to keep short-term rates at extremely low levels for an extended period of time. The markets seem to agree with our assessment, with no initial short-term rate hike priced in before the second half of 2019.

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 Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

479300

Vindication for the Fed’s Plans for Gradual Normalization

2018/04/25
Vindication for the Fed’s Plans for Gradual Normalization

Summary

The latest US economic data appear to support the Fed’s strategy and match the market’s expectations: no rate rises after the FOMC’s May meeting, but three or four hikes by the end of the year. Longer term, however, the market’s expectations don’t match what the Fed is likely to do, which could create turbulence.