Central banks / bond markets

Why such actionist behaviour on the part of the ECB?

ECB President Mario Draghi has put the ECB under enormous pressure to act on Tuesday with an announcement that has come as a complete surprise and is in my opinion economically incomprehensible: he said that the ECB was considering further monetary stimuli if inflation failed to pick up and there were no signs of economic improvement in the coming weeks. In a move most unusual for a central bank, Draghi has explicitly demanded an improvement in the economic situation and higher inflation expectations. This of course means that the current situation has taken the ECB by surprise, or that actions in recent weeks have been too hesitant. A further interest rate cut was explicitly announced and – if this were to prove insufficient – another asset purchasing programme. In purely formal terms, the new monetary orientation might have been prompted by the visible decline in inflation expectations, and, in particular,…

The invisible rise in risk

The global central bank interest-rate cycle points downwards. This impacts on the yields on government bonds, which are falling worldwide. In Germany, Bunds are in negative territory, even at the long end. This only serves to make the global bottleneck in investment opportunities all the tighter. As a result, the “Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index”, which covers all bond types offering a negative yield, is now back close to the highs last seen in 2016. Irrespective of whether yield decreases arise owing to a rise in risk aversion among market players or owing to the expectation that central banks will ease their monetary policy, this boosts the relative appeal of bonds offering an appropriate positive yield. Since it is now virtually impossible to achieve positive yields with government bonds, with the exception of those at the very long end, investors will presumably increasingly focus on…

ECB: Ready to act in an emergency

At today’s meeting, the ECB adjusted its forward guidance. Whereas the message in the monetary policy statement to date has been that key Eurozone interest rates would remain at their current levels until at least through the end of 2019, this timeframe has now been pushed back to the middle of next year at the earliest. In other words, the guardians of monetary policy are factoring the current risk factors (trade dispute/ Brexit) into their overall European economic outlook. The circumspect stance of the central bank is also reflected in the revised ECB staff projections. The growth outlook has been revised downwards slightly for both the 2020 and 2021 time horizons. At the same time, Draghi was keen to avoid coming across as overly pessimistic. For example, he also pointed in this context to the positive development of the Eurozone labour market. Inflation projections were adjusted only slightly. One striking…

Monetary policy cannot substitute for fiscal policy

The rising risk premiums for Italian government bonds are a thorn in the side of the Lega and its Deputy Head of Government, Salvini. At present, the government in Rome has to pay an upcharge of almost three percentage points compared to German Bunds when borrowing money for ten years in the financial market. Even crisis-riddled Greece currently hardly offers a higher mark-up. In this context, basking in the glory of his party’s victory in the European elections Salvini has demanded that not just Italy, but the ECB should bear the brunt of the additional refinancing costs Italy faces. Salvini has, however, hitherto not provided details on how this proposal should be implemented. Irrespective of how Salvini might intend to implement the idea in reality, there are several reasons why it points in the wrong direction. Firstly, ever since the Eurozone was established the principle has been that government financing…

Countercyclical capital buffer with limited impact

For years, the ECB has been keeping interest rates at very low levels, driving up equity and real estate markets in the process. Now the countercyclical capital buffer is being introduced to rectify this situation. The objective is to build up reserves in the banking system at times of economic expansion in a preemptive measure to cover losses. Once the cyclical systemic risks have been reduced, the buffer can be lowered again. In this way, the real economy is to be ensured a steady provision of credit, especially during periods of stress. According to a recommendation of the German Financial Stability Committee (Ausschuss für Finanzmarktstabilität, or AFS), the domestic countercyclical capital buffer is to be activated from the third quarter of 2019 and set at 0.25%. From this date, banks in Germany will have twelve months in which to meet the additional capital requirements. The AFS justifies the decision by…

European election: Higher turnout and unclear majorities but no lurch to the right

Europe has voted. As expected, Eurosceptics have made gains (actually becoming the strongest party in France, the United Kingdom, Italy, Poland and Hungary). Yet a populist landslide failed to materialise. Despite sustaining losses, the EPP remains the strongest group, followed by the Socialists and Democrats (S&D). These two parliamentary groups have not drummed up enough support for a grand (centre-right / centre-left) coalition: according to the latest projections, they can only expect to command 329 of the 751 seats in the European Parliament. Moreover, this figure does not take account of the fact that Hungary’s Fidesz, which will probably pick up 13 seats, could turn its back on the EPP and join a right-wing populist parliamentary majority. The EPP and the S&D will therefore be reliant on a third partner if they are to secure a parliamentary majority. Possible options here would be ALDE (liberal) or the Greens, both of…

1 2 22