Central banks / bond markets

Fear of the slowdown

Brexit has been kicked down the road again, this time until Halloween. The conditions of the extension are not very attractive for Great Britain and one may continue to hope that the present withdrawal treaty will be accepted after all. Nor should one now any longer rule out political consequences for Theresa May. A disorderly Brexit has thus been circumnavigated once again. From the central banks’ point of view this is undoubtedly a very welcome development: if one of the current pollical risks were to materialize, it could significantly disrupt the fragile growth environment. An appreciable deterioration of the economic situation would in turn pose an almost unsolvable problem for most central banks. If they act proactively, they will soon come up against their limits and could be obliged to take ever more unorthodox measures. This could unleash a crisis of confidence. But if the central banks were to remain…

The ECB’s hopes are colliding with reality

The eurozone’s monetary custodians did not resolve to adopt any new monetary-policy measures at today’s Governing Council meeting. In principle, new decisions were not to be expected because the ECB has recently extended its forward guidance and announced the launch of fresh liquidity measures. Regarding TLTRO-III, ECB President Draghi has promised that details about the precise terms of the new series will be communicated at one of the forthcoming meetings of the Governing Council. It was emphasised that the pricing of the new TLTRO-III operations will take its bearings by further developments in the economic outlook as well as by bank lending. It would appear that the ECB’s top echelons will decide definitively about the details of TLTRO-III at the June Governing Council meeting. This is when the next regular quarterly GDP projections are scheduled to be published. What is noteworthy is that Dr. Draghi accentuated in today’s Introductory Statement…

Negative interest rates impacting like a special tax in the euro zone

The low profitability of European banks has long been a problem, and the ECB in its role as banking supervisor regularly addresses this issue. While the institutions affiliated with the US Federal Deposit Insurance Corporation (FDIC) managed to generate a return on equity (ROE) of 11.8% in the fourth quarter of 2018, the 190 European banks chalked up average ROE of just 6.5%. In addition to other structural issues and business policy decisions, the ECB as monetary policy maker is also a reason for the low profitability. Banks in the USA are benefiting from the fact that their deposits, most of which are still interest free, have appreciated in value thanks to interest rate hikes, while European banks are actually having to pay an interest rate of currently 0.40% per annum on their surplus reserves at the ECB due to the deposit rate being negative. Based on current credit balances,…

Next ECB Council meeting – what can be expected

In the coming week, the eurozone’s monetary custodians are scheduled to hold their regular meeting to discuss the appropriateness of their monetary-policy stance. Given that ECB representatives already adjusted their monetary-policy settings at the March Governing Council meeting (forward guidance / TLTRO-III), we are not anticipating any milestone decisions to be announced this time round. Unfortunately, it is to be assumed that the ECB will continue to keep its cards close to its chest regarding details of the new TLTRO-III operations. At the press conference following the Governing Council meeting, at the latest, the current market speculation about the introduction of a multi-tier deposit rate is likely to be aired. This topic is the subject of controversial debate in the financial market as well as at the ECB. One of the aspects which we regard as being problematic in this connection is that the ECB would send out contradictory signals…

Negative interest rates can have undesirable side-effects

During the course of the monetary-policy deliberations at the most recent ECB Governing Council meeting, the debate finally turned to the possible negative repercussions of the persistently low interest-rate level on profitability in the banking sector. Members of the policymaking committee also discussed whether such undesirable consequences could have an impact on financial stability in the longer term. At the same time, though, it was emphasised that the knock-on effects on banks were very different, depending on which business model was being used. According to the latest ECB Monetary Policy Account, ECB representatives did not talk about concrete measures to alleviate the strains weighing on the banking sector. It should be noted in this connection that speculation about the introduction of a tiered deposit rate has picked up of late. In our view, however, such an arrangement would additionally complicate the monetary-policy communication process. We are therefore sceptical about the…

Adjustment of the deposit facility with undesirable side effects

Negative interest rates, with the deposit facility having been at -0.4% for quite some time now, have more or less become normality in the euro zone. Initially the negative interest rates were intended to stimulate banks to grant more loans, which has also proved partially effective. In the meantime, this positive effect has largely disappeared. What remains is something akin to a special tax for banks and companies in the euro zone that is diminishing international competitiveness, particularly in the banking sector. The ECB is now evidently starting to feel a little uneasy as well. This may also be attributable to the fact that the central bank has now also written off the prospect of an imminent change in interest rate policy. The ECB is now faced with the problem of negative interest rates remaining indefinitely or, if economic momentum were to decelerate even further, of key interest rates being…

1 2 21