For the ECB, a fine line between transparency and flexibility
Due to weak euro-zone inflation, we don’t expect the ECB to change its monetary policy roadmap at its next meeting. Instead, the ECB is likely to keep its options open regarding its first rate hike by keeping its forward guidance vague, though its communications should become precise as we approach the summer of 2019.
We don’t expect any significant announcement at the ECB’s 25 October meeting, but we do expect confirmation that the central bank’s asset-purchase programme will wrap up by year-end
September’s one-year core inflation number was only 0.9%; this is reason enough for the ECB not to change its monetary policy roadmap
Italy is certain to be discussed at the ECB’s next meeting, because Italy’s actions are bringing into question the rules that underpin the euro’s credibility
We do not expect the European Central Bank to take any decisions, or give further indications about its forward guidance, at its meeting on 25 October.
The minutes of the ECB’s last meeting, which were released on 11 October, reported that ECB members had discussed – for the first time – domestic cost pressures as a result of the euro-zone’s high production capacity utilization rate, and the trend towards higher wages.
However, we believe the weakness and stability of underlying inflation – which was 0.9% in September over one year – are reason enough for the ECB not to change its monetary policy roadmap.
What we do expect is that the central bank will confirm the wrap-up of its asset-purchase programme by year-end. The ECB is also likely to remain vague on when it will raise interest rates, which would be the first hike since 2011.
Faced with high expectations from the market, the central bank must arbitrate between transparency and flexibility. It is essential for the ECB to maintain enough leeway in today’s environment, which is complicated by both diverging economic cycles and multiple risks to global growth and financial stability.
So far, the ECB's diagnosis has been that the balance of risk in the euro zone remains neutral because growth is operating at a level beyond its potential, and is robust enough to offset the negative elements at work in the region.
But it will be interesting to observe whether this view evolves during the ECB’s 25 October meeting – especially given the risks posed by, among other issues, Italy’s growing crisis. Italy presents a particularly crucial problem because its actions are bringing into question the rules underpinning the credibility of the euro itself.
In this environment, we believe that the ECB's forward guidance regarding rate hikes will evolve pragmatically over the next few months, and will become more precise as we approach the summer 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. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. 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 Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions in Switzerland; 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.
Brexit negotiations will be the biggest factor in whether the Bank of England changes its monetary policy – which means the BoE will likely be driven by politics for the next few months. Don’t expect a rate hike at the central bank’s November meeting, but inflation, the labour market and the UK budget could all affect the BoE’s future decisions.