Central banks / bond markets

Lagarde is in no hurry

The 500th council meeting exactly five years after the announcement of the QE program would have been an exciting event. The fact that there were no new announcements on the ECB’s current monetary policy today was not surprising. On the one hand, the economic picture with decreasing downside risks is developing more or less as expected by the ECB. Accordingly, there was no need to change course. An interesting statement regarding indications as to whether Mrs Lagarde prefers a hawkish or dovish course was the brooch she wore today – an owl! On the other hand, in view of the strategic review of monetary policy that is now under way, the ECB will not necessarily be willing to make adjustments if it does not have to. Why should it, when in a year’s time it may have a different approach. As far as the strategic review of monetary policy is…

The ECB has changed

In the wake of the financial crisis, the ECB has noticeably changed its behaviour and its reaction function and monetary policy has undergone a structural break. Whereas in the first decade of the central bank’s existence there was still a close alignment between economic development and monetary policy orientation, the last ten years have seen an increasing decoupling of monetary policy from real economic events. One reason for this lies in the asymmetrical reaction function of the currency guardians. In economic downturns the ECB reacts faster and more strongly than in upswings. This was particularly noticeable both in the fading financial crisis and in 2015, when the ECB announced its entry into the PSPP despite the upswing, but out of concern about deflationary risks. Despite the zero interest rate policy and the extensive use of unconventional measures, the ECB has not yet succeeded in halting the trend of falling inflation…

Central banks need relief

At the latest since the ECB’s latest loosening package in September, the limits of monetary policy have been the subject of renewed discussion. Because the lower interest rates slide into the red, the more questionable the positive real effects on the economy that the central bank expects them to have. At the same time, the risks to financial stability are increasing, whether due to excessive indebtedness or price exaggerations on the stock, bond or real estate markets. But the financial markets have long since adjusted to the overabundant supply of liquidity. The hunt for returns leads to increasingly risky investments. And an excessive indebtedness does not seem to represent a large risk with a zero or negative interest rate first of all. This makes it all the more difficult for central banks to get out of low interest rates. In order to make their task easier for the central banks,…

Till the jug breaks

Central banks, in particular the ECB and the Fed, are increasingly concerned about the consequences of low interest rates for financial stability. Many asset classes have developed very positively in recent years and in some cases have moved significantly away from their fundamentally justified prices. Valuations have become expensive. This applies to the real estate markets, the bond markets and the stock markets. This development should not come as a surprise, as reference has often been made to this expected scenario. Low interest rates play the most important role. Actually, they are supposed to stimulate investment and consumption. In the current cycle, however, demand for credit has remained quite weak and the expected and hoped-for effects on the real economy have failed to materialise. On the other hand, low interest rates have led investors to take ever greater risks in their search for returns. This was supported by the hitherto…

US Federal Reserve pauses… until the next crisis

The minutes of the US Federal Reserve’s 29th and 30th October meeting, released yesterday evening, show that the currency guardians continue to view the risks to the economic outlook as high. Against this backdrop, a rate cut would have been appropriate, even though the decision to do so was a close one. However, most FOMC members were of the opinion that the monetary policy orientation was now appropriate following the recent interest rate move. This makes further rate cuts unlikely for the time being. For the interest rate cuts to continue, the economic outlook would have to deteriorate noticeably again. The risks associated with the still smouldering trade conflict with China are high and can quickly become a significant economic risk. There are different interpretations of the state of negotiations between the USA and China. It should be noted, however, that both sides should welcome a positive development. On the…

Ciao, Signor Draghi!

Ciao, Signor Draghi! Mario Draghi’s term as President of the ECB ends after eight years. At his last press conference there were no more monetary surprises, but this meeting was no non-event either. Compared to his opening statement at the September Council meeting, the topmost monetary watchdog drew a somewhat gloomy economic outlook. The central bank superiors expect the economy to remain weak. There is thus a risk that the recession in the manufacturing sector could also affect the service sector. This would also damage the domestic economy. Against this backdrop, the monetary policy measures recently discussed by the Governing Council of the ECB should be seen as a hedge. However, the hopes of market players to obtain further information on the precise structure of bond purchases were disappointed. It is therefore to be expected that APP purchases will be based on past practices. However, subsequent adjustments cannot be ruled…

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