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Weak Inflation Should Prompt ECB to Hold Fast 

Franck Dixmier 


Franck Dixmier


Don't expect the European Central Bank to announce any major policy change at its January 19 meeting, says Franck Dixmier. While neither inflation nor job growth are strong enough to change course right now, the ECB may soon reach its limits.
We do not expect the European Central Bank (ECB) to change its monetary policy this week; by staying the course, the ECB will be able to confirm its engagement with bond markets and its long-term impact on them.

This strategy is being driven primarily by the weakness of underlying euro-zone inflation—which, at 0.9% according to the latest publications, remains far from the ECB's medium-term objective of 2%.

Furthermore, the positive growth dynamic evidenced by leading indicators is insufficient to change things significantly.
European job creation is too weak to drive wage increases and hence raise core inflation
In particular, job-creation numbers are too weak to generate any wage increases meaningful enough to sufficiently raise core inflation.

Against this backdrop, ECB President Mario Draghi's speech on January 19 must be seen in the light of the monetary-policy meeting that preceded it: We expect he will confirm the central bank's dovish bias and keep open the possibility of resorting to any and all options the situation might make necessary.

However, ECB policy is approaching its limits as time goes by. In our opinion, the threshold of holding more than 33% of a country's outstanding debt is one that the central bank will refuse to cross, but it is unlikely that 2017 will see the bank either taper or begin halting its asset-purchase program.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585,, 1-800-926-4456.


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