The familiar knee-jerk reflex is quite simple: if the patellar ligament is tapped lightly, the lower leg lifts. The international central banks are behaving in much the same way at present. Something extraordinary happens, the current case being Brexit, and after a short period, there are vociferous promises by central banks to further ease monetary conditions in the near future. This was the case yesterday when the Bank of England announced that it would cut interest rates in the near future as a precautionary measure and the ECB announced that it would shortly amend the terms of its public sector purchase programme. In future the purchase key could be based on market capitalisation and not on countries’ shareholdings in the ECB. This could imply that the level of a country’s debts determine the share of the bonds to be purchased under the ECB’s purchase Programme.
The capital market also reacted as normal. Equities and corporate bonds have benefited and the yields on sovereign bonds have fallen. However, I do not believe that such announcements still have a sustained positive effect on investor confidence. As a result, the stabilising effect of such announcements on the financial market and economic development is also likely to be very minor.
At the same time, the pressure on savings and the banking system caused by low yields in the Eurozone is increasing constantly. This is becoming more and more apparent in Germany, in particular. The increasing debate regarding the issues of negative interest rates for retail clients and occupational pension schemes are clear signs of rising anxiety. In the medium term, this could contribute to further destabilisation in the Eurozone, which is precisely the opposite of what the ECB would like to achieve.