The ECB should remain calm but alert

Comments by Franck Dixmier , Global CIO Fixed Income at Allianz Global Investors, ahead of the ECB meeting on 3 February 2022

• Against the backdrop of a continuing health crisis, high geopolitical risks and inflation which is still considered transitory, the European Central Bank is not expected to make any significant announcements at its next policy meeting
• We expect the ECB to reaffirm its willingness to be "nimble", like the Fed, and to remain ready to intervene if inflation does continue to accelerate
• Markets appear confident in the ECB's forecasts, and we do not expect to see any noteworthy reaction

We do not expect any significant announcements at the ECB's monetary policy meeting on 3 February 2022, given the risks to growth in a context of high geopolitical tensions and inflation which is still considered transitory in the euro zone.?

With the continuing health crisis and supply chain bottlenecks, the risks to the euro area's growth outlook are tilted to the downside. The International Monetary Fund has revised its 2022 growth forecast for the euro area to 3.9% – down 0.4 percentage points – and 2.5% in 2023, slightly above potential growth. In addition, geopolitical risks, notably the conflict between Ukraine and Russia, have increased and could have real impacts on growth and inflation.

The ECB also continues to view the current inflation peak as temporary. Despite inflation standing at 5% in December against 4.8% expected (mainly caused by a 26% increase in energy prices), and with core inflation at +2.6%, we anticipate that it should fall back below the 2% target by the end of the year; this tallies with the view outlined in December by Christine Lagarde, and more recently by several central bank figures.

This meeting should be an opportunity for the ECB president to take up the rhetoric communicated by a number of other members of the Governing Council in recent weeks. The ECB should reiterate its willingness to be, like the Fed, pragmatic and nimble, and ready to intervene if inflation remains too high in relation to its 2% objective. Among the tools at the ECB’s disposal, the first would be to stop net purchases, as suggested by Philip Lane, the ECB's chief economist. Only after net asset purchases have been stopped would the criteria for raising interest rates be considered.

We believe that the comparatively hawkish stance of the Fed, which used its January meeting to announce that it is considering not only raising rates but also reducing the size of its balance sheet before long, should not influence the ECB's decision-making at this stage. The US and the euro zone are no longer in the same cycle, especially in terms of inflation: there are no signs of a price/wage loop in the euro zone. Further, the ECB is not under pressure from public opinion, except perhaps in Germany and perhaps most importantly, it has already done something to appease the hawks by stopping the PEPP.

Neither is the ECB under pressure from the markets, which seem to be buying its talk of transitory inflation, as shown by the decline in inflation expectations: the 10-year break-even inflation rate fell from 1.95% in October to 1.74% on 28 January, while the 5-year rate fell from 2.10% in October to 1.81% at the end of January, even though prices were still rising.

We do not expect this meeting to have any significant impact on investors. However, the 35bp increase in the deposit rate to -0.15% by the end of the year anticipated by the markets seems premature.

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