Allianz GI have just released their March QE monitor, titled “The stronger euro does not thwart the ECBs slow motion exit”. This is an interesting summary of where we stand today with QE in the Eurozone, and what we can expect from the European Central Bank in the near future. It underscores our belief that rates will stay below neutral for the foreseeable future.
In the first part, they raise several questions. The first; From what exactly will the ECB Exit? Referring to the fact that the ECB has introduced several non-standard measures since the onset of the GFC in ’08.
Secondly, they ask, When should the ECB exit? As inflation still does not meet the four necessary conditions for price stability Mr. Draghi set out in January of 2017;
- Medium term prices should be stable (short term deviations are acceptable)
- Durable price stability (not just driven by base effects)
- Self-sustained price stability (persistent, even when the extraordinary policies end)
- And it should be broad based across the Eurozone.
The Allianz presentation then looks deeper into inflation drivers, and the longer-term outlook for inflation, and loan growth. They argue that given the Eurozone’s improving economy and easy credit standards, the outlook for loan growth continues to be favorable, which underscores the ECB’s confidence in it’s policy effectiveness. There is also little danger of the economy overheating. These conditions allow the ECB to exit QE gradually .
Finally, they ask how the ECB should exit, and they review the toolkit the ECB has to normalize monetary policy. They conclude that the instruments at the ECB’s disposal are complementary, and that the key will be a careful calibration and communication of the exit strategy.
Allianz presents a stylized exit strategy, based on the ECB’s current guidance;
In the second part of the presentation they posit that for now, the European sovereign bond markets remain prone to volatility, due to the ongoing “tug of war” :