Central banks keep going

This week, central banks in Japan, the US and the euro area discussed and announced their decisions. The tone of all three central banks is that all monetary policy forces will be deployed to support the economy.

The bond purchase programs will continue unchanged and the volume will be increased if necessary. Liquidity will continue to be made available in abundance and central banks will accept an ever wider range of collateral to avoid bottlenecks. The Fed has also expanded direct access for companies to central bank liquidity. The ECB has also decided to further ease monetary policy. With the introduction of PELTROs (Pandemic Emergency Longer-term Refinancing Operations) the key interest rate was de facto lowered by 25 basis points and is now at minus 0.25%, although the refinancing rate has not been officially changed. The key interest rates of all central banks thus remain at 0%.

The new crisis programmes are likely to run until next spring, if the COVID-19 pandemic does not regain momentum. No tightening of monetary policy is expected in the next three to four years.

This means that the almost paradisiacal environment will remain in place for the financial markets. No interest rates, high liquidity and a high degree of risk assumption by the central banks. Shares, bonds and all other risk assets should continue to benefit strongly from this development. The high valuations that have already been achieved in some cases should not be too disturbing here, as the support of the central banks will wipe away all concerns.

There will certainly be repeated setbacks on the financial markets, but a long downward trend cannot really be expected. This assessment will only change when the central banks fundamentally change their monetary policy approach. However, such a significant change in monetary policy would require an external trigger – either inflation accelerates sustainably or there is a loss of confidence in the central banks or the currency. In such a case, there would probably be a long stretch of losses on the financial markets. However, this is likely to take some time and the central banks will have enough time to prepare an exit with a long lead time.

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