Eurozone slowdown risks an ECB stalemate

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Monthly Investment Strategy

• Eurozone economy slowed down from 3% annualised a year ago to 1% now for lots of one-off reasons from a mild winter, to strikes in France and political uncertainty in Italy, or specific issues related to the German car industry or the chemical sector…
• Eurozone core inflation has also been disappointing, staying stubbornly around 1% for two years now. Inflation levels and the output gap could easily justify higher interest rates. The unfavourable momentum, however, argues for a delay, which could see the window for normalisation closing with the end of the global economic expansion.
• We see the probability of our “European Central Bank (ECB) Stalemate” risk scenario rising to 40%. In this scenario the ECB keeps key interest rates at their current level (-0.4% for the deposit rate) until 2022, with 10-year bund yield likely staying at 0.1% until the end of 2020, with a risk of collateral scarcity pulling yields even lower into negative territory