The inflation rate stubbornly refuses to rise and Mario Draghi will be forced, once again, to announce large-scale measures to ensure eurozone growth is secured.
Krautzberger and his team, who oversee around €60 billion in European bond assets, believe the European Central Bank will pull out a major move at its next meeting in March.
‘We expect a significant reduction of the inflation target for 2016, another rate cut by 10 basis points and an extension of monthly purchases, as our baseline scenario,’ he told Citywire Selector’s sister site Citywire Deutschland.
The ECB´s current monthly purchase of €60 billion worth of bonds has not brought the central bank much nearer to its 2% inflation target. It approached 0.4% in January, slightly up from 0.2% posted for December.
Markets were widely disappointed in December when the ECB opted to take no further action but Krautzberger believes expectations at this point were too high. However, given current macro circumstances, he said it is now pertinent for them to act.
‘The economy is currently going relatively well and inflation is at zero. The question is what happens when we get into something like a crisis. Nobody knows when the next crisis will come but it will. Then we face a deflationary scenario like we have seen with Japan over the last decade.’
Krautzberger said markets are currently discounting any rise in inflation, which means inflation-linked bonds are largely under-valued and he has increased his exposure here since the start of the year. Should the oil price stabilise, he expects inflation to hit around 1.5%.
The top allocation in the BGF Euro Short Duration fund, which has €9 billion in assets, is a 10% exposure to Ireland. Unlike fellow heavyweight bond investor Michael Hasenstab, who sold out of his Irish positions this month, Krautzberger thinks it still has long-term potential. Over the next few years, the country will no longer be viewed as a peripheral country but will begin to be viewed as semi-core,’ he said.