‘Good Chance’ of QE in Europe to Prevent Deflation, Says PIMCO

(May 29, 2014) — The European Central Bank (ECB) is increasingly likely to opt for a full-blown quantitative easing (QE) programme in the coming months in a bid to address falling inflation, says PIMCO.

Following the fixed income giant’s latest “Secular Outlook” meeting earlier this month, Deputy CIO and European Managing Director Andrew Balls told a media briefing in London that PIMCO’s senior management felt there was a “pretty good chance of QE” in the Eurozone.

“The ECB could do negative policy rates or another long-term refinancing operation,” Balls said. “We think there is a pretty good chance of QE if the ECB takes inflation seriously.”

The central banks of the US, UK, and Japan have all pumped billions—even trillions—of dollars into their financial systems in a bid to boost liquidity in the aftermath of the financial crisis, but the ECB has so far resisted. This is despite the single currency bloc coming close to breaking up in 2011 when Greece defaulted on debt payments.

But in a press conference following the announcement of its interest rate decision on May 8, ECB President Mario Draghi spoke of a “consensus” within the bank’s rate-setting committee of a need for action, although he said no action would be taken before Eurozone inflation data is published in June.

In the group’s new Secular Outlook, PIMCO’s senior investment staff have forecast a period of relative stability when compared to the previous five years, but one dominated by low interest rates, which will continue to support asset prices.

“We see a stabilisation of the European economy with growth of 1-1.5% on a three to five year view,” Balls said. “Our baseline is for stability and for the ECB to keep policy rates at a very low level because of the risks involved if we saw significant increases in funding costs.”

He added that lower policy rates would continue to be supportive for asset prices despite some equity markets continuing to punch through all-time highs. Although the rate levels had “brought forward some returns”, he said valuations in equity and fixed income in general “look reasonable”.