In the bond market, investors are pricing in inflation in Germany, Europe’s largest economy, of just 0.85 percent per year over the next decade. The ECB’s goal for the euro region is just under 2 percent. That’s upped the ante for ECB officials ahead of their two-day meeting starting March 9.
“There is a chance of a dovish shock” from the ECB, said Salman Ahmed, the chief strategist at Lombard Odier, which oversees about $150 billion. “German bunds should start to look very much like Japan in the coming months. We may see some volatility but the underlying gravity is toward lower interest rates.”
Ahmed expects the ECB, which has held its deposit rate below zero since mid-2014, to drop the rate even further. He also anticipates the central bank will start buying more bonds and extend the end date of its quantitative-easing program. The ECB’s current plan calls for purchasing 60 billion euros worth of bonds every month through March 2017.
Traders have already priced in a 0.1 percentage point cut in the deposit rate to minus 0.4 percent. Standard Life, Scotland’s second-biggest money manager, expects the ECB to increase its QE program about 15 billion euros a month.
Central-bank officials are doing little to discourage that view, with Executive Board Member Benoit Coeure saying on March 2 that ultra-low rates are justified by sluggish growth and inflation. A day earlier, Draghi said in a statement that ECB policy had to be seen against the background of increased risks to its own economic forecasts. The central bank will publish updated figures on March 10.
“We don’t see a bear market for government bonds,” said David Tan, the head of rates at JPMorgan Asset, which oversees more than $1.7 trillion globally. “This combination of low growth, low inflation and central bank accommodation with more to come will keep the environment very favorable.”