A turning point for the ECB

?Comments by Franck Dixmier, Global CIO Fixed Income at AllianzGI, ahead of the ECB meeting on 9 June 2022?

• In line with the statements of its various members, the ECB should confirm the end of its asset purchases at the end of the month; we also expect the ECB to announce a July rate hike – its first in 11 years.
• ?Faced with inflation that continues to surprise on the upside, the ECB should adopt a firm tone and affirm its determination to fulfil its price stability mandate.
• ?Despite the growing debate on the amount of rate hikes, we believe that the ECB should nevertheless stick to its plans and act with restraint by sticking to a 25 bp hike in July.

Unsurprisingly, and in line with the sequencing of policy measures repeatedly communicated by its leaders, the European Central Bank is expected to use its next meeting to confirm the end of its asset purchases in June and announce a rate hike in July – the first increase in 11 years. The 9 June ECB meeting will therefore mark a real turning point in its monetary policy.

?Faced with the steady increase of year-over-year euro-zone inflation figures – in May, total inflation reached 8.1% and core inflation reached 3.8% – the ECB is under pressure. It must find an appropriate response, and it should be driven by a sense of urgency that has been almost non-existent in its actions and speeches. In fact, 14 countries have inflation above 8.1%, including Germany (8.7%).[1]

ECB President Christine Lagarde should therefore adopt a hawkish tone, and affirm the ECB's strong determination to fulfil its price stability mandate.

She is also expected to speak on the issue that has captured the markets' attention, namely the timing, magnitude and pace of rate hikes. The publication of the May inflation figures has rekindled the debate within the Governing Council between those in favour of an initial 25-basis-point hike and those in favour of a 50 bp hike. Markets have started to reflect the possibility of a 50 bp hike as early as July and by the end of 2022, and they are also building in a hike at every ECB meeting until the end of 2022. ?

However, we believe the ECB should stick to its plans and speak loudly, but take a gradual and moderate approach. Faced with a slowing economy that is beginning to materialise in the euro zone – and especially in its largest economy, Germany – the central bank should remain cautious and not strike a blow in July. For its first step, the ECB should therefore favour a 25 bp increase, while insisting on the possibility of acting more forcefully if necessary.

?By leaving the door open to higher rate hikes, the ECB is likely to give a nod to the hard line in the Council to try and contain inflation expectations. Nevertheless, this shift in monetary policy should continue to fuel the gradual rise in long-term rates in the euro area.

?

?

?

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 for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. 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 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, authorized by the Internal German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; ; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK). [2229810]?

[1] Source: Bloomberg as at June 2022.