Recent ECB comments suggest that the horizon for a rate hike may be moving further away, based on the central bank’s uncertain growth outlook and concerns over weak inflation. The ECB is also keen to preserve banks’ ability to lend to the euro-zone economy.
We expect the ECB to confirm its extremely accommodative monetary policy stance at its next meeting; the pause in normalisation could last, and short-term rates are well anchored
The ECB is likely to emphasise its uncertain outlook for growth and concerns about weak inflation expectations as justification for its ultra-accommodative policy
Look for the ECB to highlight that it still has room for further monetary easing, although this could fuel market uncertainty
When the ECB’s monetary policy committee next meets, on 10 April, we expect it to confirm its extremely dovish stance. Mario Draghi implied as much after the ECB’s March meeting, when he announced the bank’s intention to leave the deposit rate unchanged, at -0.40%, until at least 2020. Mr Draghi went even further during a 27 March conference, where he stated that he was reflecting on ways to preserve the benefit of negative rates for the euro-zone economy while mitigating their side effects on banks.
This suggests that the horizon for a rate hike is moving further away – or even that the -0.40% deposit rate could fall further in the event of a crisis. The profitability of euro-zone banks is being eroded by what is effectively a 40-basis-point tax on their excess reserves, and the ECB is keen to preserve banks’ ability to lend to the economy. This raises the possibility that the ECB might announce the implementation of a multi-tier deposit facility, similar to the one set up by central banks in Switzerland, Japan, Denmark and Sweden. Under this scheme, the taxation of banks' excess reserves would be triggered above a threshold that is specific to each institution.
These new concerns could also be reflected in the terms for the third round of targeted long-term refinancing operations (TLTRO 3) – cheap loans from the ECB to banks – that are planned for September. Details are not yet available, but we would not be surprised if the ECB’s new TLTRO 3 facility allows participants to borrow at a rate lower than the refinancing rate (ie, a negative rate similar to TLTRO 2).
The ECB used its recent statements to demonstrate that it still has room to manoeuvre – beyond the quantitative easing that is already part of its toolbox – and that its monetary policy has not reached its limits. At the same time, Europe’s central bank is operating within a framework constrained by the US Federal Reserve’s new "behind the curve" positioning, which investors perceive as a lasting pause in rate hikes.
Yet we wonder about the timing and content of the ECB’s new forward guidance. The ECB insists on freeing up room to manoeuvre, but that raises questions about whether it has a worse-than-expected outlook for euro-zone growth and inflation. By highlighting economic risks and emergency measures that do not seem necessary today, the ECB could be adding fuel to the uncertainty that still weighs on the markets.
Never in recent times have short-term rates in the euro zone been so well anchored, which paves the way for lower rates throughout the curve – and for longer than investors expected. We think it is likely that the German yield curve will settle into negative territory for a prolonged time. In the event of a future euro-zone recession – which is not our base-case scenario – the prospect of an even more negative deposit rate could lift long-term rates into unknown territory. In this context, one thing is certain: more than ever, the motto "never short the Bund" seems valid.
March Madness? The stock market’s Cinderella story
Much like last year's underdog, the stock markets faced some obstacles going into 2019—plenty that would give them reason to extend their end-of-2018 slide. But also like the Cinderella team, stock markets overcame adversity and rallied last month, continuing to build on their impressive gains since the start of the year.
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 communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
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, authorised by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; 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. 424) 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.