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 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.
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About the author
Global Chief Investment Officer Fixed Income
Franck Dixmier is Global Chief Investment Officer (CIO) Fixed Income and a Managing Director with Allianz Global Investors. In this capacity, he leads and oversees the development of the firm’s Fixed Income capability and investment offering. He is a member of AllianzGI’s Investment Executive Committee and International Management Group.
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