Pimco - Global Central Bank Focus: The Changing Dynamics of Eurozone Inflation

Key Points
- European Central Bank President Mario Draghi indicated the Governing Council discussed the possibility of increasing asset purchases and potentially cutting the Deposit Facility interest rate, currently -0.2%, at its meeting in October.

- Because asset purchases exogenously raise the quantity of base money and eurozone banks - as well as some non-bank financial institutions - ultimately have no choice but to hold base money or its substitutes - we think it makes little sense for the ECB to simultaneously tax excess reserves with negative rates.

- For investors, the changing dynamics of inflation and the ECB's response to it are set to keep the yield curve low and steep, with excess liquidity supportive of higher-yielding corporate and peripheral government bonds and stocks.