Low oil prices lead to low inflation, leads to low bond yields

This revision is basically motivated by a lower forecast for inflation of 0.1% in 2015 (annual average headline inflation in EMU) and 1.2% in 2016, which is in turn based on a lower level and trajectory for oil prices. This has also pushed inflation expectations down. In our view these are transitory deviations from the inflation benchmark of below, but close to 2% that could be ignored by monetary policy. The ECB, however, has signaled its concern about the recent developments and thereby given rise to expectations of further quantitative easing. In our view, the impact of further easing on both actual inflation and inflation expectations is likely to be muted.

For 2016, however, we do expect a moderate increase in oil prices and a corresponding uptick in consumer price inflation. Under the assumption that consumer prices rise by 1.2% on average, short- and medium-term inflation expectations will also move up. This, along with the change in the Fed’s policy stance, will create moderate upward pressure on bond yields – notwithstanding the fact that the ECB will continue its bond purchase program. We expect bond yields and inflation to rise in parallel, so the level of real interest rates will remain at practically zero. The challenge of low interest rates for savings products and pension assets is therefore here to stay.


We do not see major consequences of the lower forecast of interest rates for the euro-dollar exchange rate as the Federal Reserve is also treading cautiously with its change of course and is likely to take countermeasures should the dollar rise strongly. We therefore stick to our forecast that the euro will be moderately weaker in the next couple of months but will climb to 1.15 USD/EUR by end-2016.

Dr. Michael Heise

Allianz SE
Phone +49.89.3800-16143

Send e-mail