9 Mar 2015
ECB won’t be able to hike rates for the rest of the decade – DB
FXStreet (Barcelona) - With the large output gap diminishing chances of generating inflation any time soon, the Deutsche Bank Team views that ECB won’t be able to hike rates for quite a while, and further shares the consequences of this.
Key Quotes
“In the Wednesday FX Daily George Saravelos asked not if the ECB is priced but if pricing is here to stay. Will the ECB be able to hike rates for the rest of the decade? He contends they will not be able to since the output gap is too big to generate inflation any time soon.”
“This leads to three consequences:
1 - Only European equities will have a growth beta. The growth beta of European assets that primarily respond to monetary policy should drop to zero.
2 - Euro has much more to weaken. If the Japanization of ECB policy is here to stay, then so must the portfolio flows required to adjust to this new equilibrium. It may have taken yields a few months to get down to zero, but it will take far longer for portfolio flow shifts to materialize.
Investment decisions have to filter through investment committees and retail allocation shifts. Europeans need to become net creditors to the rest of the world. It will take at least another trillion of European outflows to get there.
3. Bond conundrum is here to stay. The secular stagnation debate is most relevant for Europe. It is close to the record US-European 10-year rate differential that in our view will remain the primary driver of depressed global yields. And it is this view of the world that requires much less conservative assumptions around how high Fed rates can go.”
Key Quotes
“In the Wednesday FX Daily George Saravelos asked not if the ECB is priced but if pricing is here to stay. Will the ECB be able to hike rates for the rest of the decade? He contends they will not be able to since the output gap is too big to generate inflation any time soon.”
“This leads to three consequences:
1 - Only European equities will have a growth beta. The growth beta of European assets that primarily respond to monetary policy should drop to zero.
2 - Euro has much more to weaken. If the Japanization of ECB policy is here to stay, then so must the portfolio flows required to adjust to this new equilibrium. It may have taken yields a few months to get down to zero, but it will take far longer for portfolio flow shifts to materialize.
Investment decisions have to filter through investment committees and retail allocation shifts. Europeans need to become net creditors to the rest of the world. It will take at least another trillion of European outflows to get there.
3. Bond conundrum is here to stay. The secular stagnation debate is most relevant for Europe. It is close to the record US-European 10-year rate differential that in our view will remain the primary driver of depressed global yields. And it is this view of the world that requires much less conservative assumptions around how high Fed rates can go.”