Feb 28, 2019 Bonds

ECB gripped by fresh fears

It was meant to be the year when ultra-loose monetary policy was unwound. But an interest rate hike is being pushed back again in 2019. An insipid growth and inflation outlook is quashing optimism.

  • Euro central bank delays interest rate hike to 2020 at the earliest.
  • Growth and inflation not expected to reach 2 percent by 2021.
  • New pessimism pushes German government bond yields lower.
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When European Central Bank (ECB) president, Mario Draghi, hands over to his successor in the autumn, he will be the first ECB president who has not raised the base rate once in eight years – that much is now certain. For after its latest meeting, the ECB announced that an interest-rate hike could not be considered until 2020 at the earliest in light of the insipid outlook for growth and inflation.

Investors who had hoped to earn higher interest again in 2019 are once more to be disappointed. The market yield on ten-year German government bonds temporarily halved to 0.06 percent on the ECB’s fresh assessment, while nine-year bonds actually slipped back into negative territory.

The central bank’s new pessimism caused huge surprise. The ECB had, after all, announced earlier that it would gradually unwind its ultra-loose monetary policy this year. It had even signalled the possibility of a first hike in the base rate after three years of zero interest rates. Now, investors, savers and banks must live with the knowledge that in the worst case scenario an interest-rate turnaround may not happen for years.

Murky yield outlook for fixed-income persists

The central bank’s arguments hold water: it fears that economic growth in the eurozone is beginning to slow and that inflation shows fewer signs than ever of returning to normal levels from its current abnormal low. This state of affairs calls for a further easing of the base rate rather than for near-term interest rate hikes.

From the investor point of view, this means investing in new government bonds from eurozone countries will remain unattractive for some time to come. In the fixed-income sector, the best hope of a halfway adequate yield still seems to be in corporate bonds. However, corporate bond investors must swallow significantly higher risk.

Growth and inflation are weak

Anyone studying the ECB’s statements in detail will be struck by their pessimism. For instance, the eurozone central bank expects the economy to grow by just 1.1 percent this year. Previously, the monetary policy wonks had expected expansion of 1.6 percent. The figure should now be 1.6 percent next year and just 1.5 percent in 2021. The central bank also garnishes its series of weak forecasts with the proviso that the outlook could weaken further if the USA’s trade conflict with China and the EU were to broaden.

Neither is the most important guide for Frankfurt's monetary policymakers – inflation in the eurozone – anywhere near normalising. According to ECB estimates, inflation will be 1.2 percent in 2019, 1.5 percent in 2020 and 1.6 percent in 2021 – this despite the extremely loose monetary policy of recent years. This means the ECB has for now probably abandoned its inflation target, which is set by default at just under 2 percent.

All statements of opinion reflect the current assessment of DWS International GmbH and are subject to change without notice. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical performance analysis, therefore actual results may vary, perhaps materially, from the results contained here. Past performance, actual or simulated, is not a reliable indication of future performance.


This text has been translated from German into English.

DWS International GmbH as of March, 2019

CRC 065675(03/2019)

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