For the ECB, a fine line between transparency and flexibility

Franck Dixmier | 19/10/2018
Franck Dixmier

Summary

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.

Key takeaways

  • 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.

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Expert-Image

Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer (CIO) Fixed Income Europe, and a member of the Global Executive Committee at Allianz Global Investors.

Politics are driving the BoE's decisions

Mike Riddell | 25/10/2018
Politics are holding the BoE hostage

Summary

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.

Key takeaways

  • The market has already priced in a 25bps rate hike, but we don’t expect the BoE to raise rates at its next meeting
  • Brexit will be the biggest factor in what the BoE does: the UK economy could get a boost if pent-up demand resurfaces, but a hard Brexit could force the BoE to be more accommodative
  • We don’t expect major market moves from BoE’s next quarterly inflation report, but we believe inflation will move steadily downwards in the coming months
  • Any revisions to the BoE’s labour-market outlook will likely happen next February, rather than in November
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