Ward, who started her career at the Bank of England and was chair of the Council of Economic Advisers for the UK chancellor in 2016, said worries about deflation in Europe, where it is stuck at around 1%, would likely delay the European Central Bank (ECB) from scaling back its quantitative easing programme.
“Expectations that the ECB are going to stop buying assets are overdone,” Ward told a press briefing on Tuesday to discuss the fund manager’s 2018 market outlook.
“They are worried about deflation and will likely wait too long to stop QE,” Ward said.
A drop in unemployment across the euro zone, to 8.7% in November, and an economy surging ahead at its strongest pace in a decade has fueled speculation the ECB could accelerate the tapering of its QE programme this year.
This helped drive up the value of the euro which reached a high of $1.2068 last week – its highest close since January 2015.
Ward believes the ECB will likely wait to ensure the current economic recovery reaches every corner of Europe before any normalisation of monetary policy begins.
Nandini Ramakrishnan, global market strategist at J.P. Morgan AM, said she remains convinced the ECB will continue to taper its asset purchase programme, “but will want to be much more convinced that activity and inflation are on an upward path before raising rates.”
The risk, according to Ramakrishnan, is that inflation returns with more vengeance, which is why J.P. Morgan AM is advising its clients to be aware of the liquidity and duration risks in their fixed income allocations.