The European Central Bank (ECB) has been much more dovish this year as macroeconomic conditions in the eurozone have quickly deteriorated.
Even taking into account the bank's latest turn in rhetoric and downward economic revisions, we expect the ECB to eventually move towards easing policy further.
The ECB's forward guidance currently sees interest rates staying on hold through 2019. We believe the bank's next move could be a rate cut - especially if tiering of the deposit rate is adopted - rather than an interest rate hike, because inflation continues to undershoot.
We have held this view for several months because the "pervasive uncertainty" the ECB referred to at the March meeting continues to worry us, especially when it comes to inflation and growth dynamics in the manufacturing sector.
The latest data from Europe confirms the weak picture, as the headline rate of inflation dropped to 1.4% in March and the core inflation print (0.8%) moved yet farther away from the ECB's 2% inflation target.
A plunge in German factory orders was also notable as February orders fell 4.2% in the most pronounced decline in a decade. The five German leading research institutes slashed their forecasts for growth expansion in half, to 0.8% in 2019.
This atmosphere of continued low-for-long rates means sustained downward pressure on sovereign European bond yields is likely.
Coupled with the US Federal Reserve's dovish pivot, a search-for-yield-environment is likely to take hold once again in global risky asset markets. We expect 10-year bund yields to continue to hover in negative yield territory for now.
Looking ahead, the choice of the incoming Governing Council president will be critical in shaping ECB policy. The policy arsenal available to the central bank is limited at this point, especially in the event of a pronounced recession.
Indeed, by lowering its economic forecasts, the ECB has prepared the ground for further easing, should the next president continue to shape policy in a similar vein to current president Mario Draghi.
Salman Ahmed is chief investment strategist at Lombard Odier Investment Managers
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