ABN AMRO economists think that weakness in the eurozone economy and subdued inflation will trigger additional monetary easing and cause the European Central Bank to cut the policy rate and step up its pace of net asset purchases.
Key quotes
“ECB President Mario Draghi’s comments before the European Parliament’s Economics and Monetary Affairs committee were consistent with this view. He said that ‘the longer the weakness in manufacturing persists, the greater the risks that other sectors of the economy will be affected by the slowdown’ adding that manufacturing indicators showed no ‘convincing signs of a rebound in growth in the near future’. He said that the Governing Council stands ‘ready to adjust all of our instruments if warranted by the inflation outlook’.”
“Market impact – In our view, economic weakness and a new round of stimulus suggest that long rates and government bond yields will see a new leg down and will eventually surpass previous record lows, with curves (2s5s and 2s10s) flattening. In contrast, the weakness in the economy will likely be bad news for credit spreads.”
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