Central banks / bond markets

ECB accounts: technical framework for TLRO in preparation

From the ECB accounts for the January meeting of the Governing Council, it emerges that the currency guardians discussed the possible risks to the EMU’s economic outlook at some length. The most recent economic data had turned out to be weaker than ECB representatives expected. One of the factors cited as a driver of this development was the introduction of the new emission standard (WLTP) and its negative impact on automotive production. Governing Council members agreed that it was not yet conclusively clear how long the economic dip would persist. Moreover, they expressed uncertainty with regard to how this would impact on the medium-term growth outlook. ECB representatives agreed with the analysis of Chief Economist Praet that the downward risks to the Eurozone’s growth outlook have increased. Where inflationary developments are concerned, the Eurozone’s senior central bankers continue to believe that fundamental price pressure in the Eurozone is on the…

The ECB’s two souls

Over the past few weeks, speculation has been rife that the ECB may well be poised to launch a fresh liquidity injection for European banks. In principle, new long-term tenders would enable the monetary custodians to ensure that financing conditions remain favourable even after the current TLTRO-II operations have matured. What is noteworthy is that this particular topic is already being keenly debated; after all, the first TLTRO-II tender will only be falling due in June 2020. This sense of temporal urgency is a result of regulatory requirements for banking institutions. If the residual maturity of cash flows falls below a one-year horizon, they no longer count when certain parameters (net stable funding ratio / liquidity coverage ratio) are computed. Against this backdrop, banks from the European periphery in particular – especially Italian and Spanish banking institutions – could be compelled to shrink their balance sheets in order to comply…

“Sovereign-bank nexus” a bone of contention

The problem of the “sovereign-bank nexus” has still not been resolved nine years after the European sovereign financial crisis began. Far from it: the most recent results of the EBA stress tests show exceptionally strong home bias for Europe’s banks – which is even higher in the periphery than it is in core Europe. The preferential regulatory treatment for EU government bonds in bank balance sheets as well as the liquidity ratio requirements are causing increased demand for government paper. While the share of all outstanding government bonds held by domestic banks has fallen in recent years in most countries, with the exception of Italy and Greece, this is a result of high demand from the ESCB due to the PSPP. If the ECB decides to reduce its balance sheet in the medium or longer term, there is a danger of a shortage of demand for government bonds in the…

Italy: populist alliance on shaky ground

The populist coalition in Italy is faltering increasingly. While M5S (Five Star Movement) and Lega were singing from the same hymn sheet last autumn in the fight against the budgetary requirements laid down by Brussels, the relationship between the coalition parties is now marked mainly by dispute. The conflicts revolve on the one hand around the migrant policy, as the right-wing populist Lega favours a particularly tough stance against immigration. On the other hand, major dissent surrounds both economic and financial policy as well as transport policy. Lega is going along somewhat grudgingly with the government plans on guaranteed basic income, while the left-wing populist M5S is opposed to expensive infrastructure projects such as the rail connection between Turin and Lyon (total cost of EUR 26bn). Although both government partners have so far denied they are eyeing up a coalition, breakup, media reports state that Lega is already sounding out…

Inflation rate in Euroland moves further off the ECB target figure

Euroland inflation is receding further. In January the annual rate shows a rise of 1.4%, as against 1.6% in December 2018. The reasons for the downward movement are (as in past months) energy prices, which by comparison with the previous year are now exerting only modest pressure on prices. As a result, doubts are growing whether the ECB will achieve its inflation target of “close, but below 2%”. The hopes of ECB President Mario Draghi have rested of late on the countries that are currently having to contend with an increased lack of skilled labour and rising wage increase levels, above all Germany. There, but also in many other Euroland member states, the momentum on the wage front has at best been at a sound level. The harmonised inflation rate steadied in Germany at 1.7% in January. In other words, at least in coming months, no noteworthy boost to the…

Returning to monetary policy normality is a challenge

he European monetary authorities have used conventional as well as unconventional monetary policy measures to counter the knock-on effects of the financial and debt crisis in recent years. However, it is now becoming increasingly clear that the monetary policy toolbox is virtually empty – as evidenced by the fact that the European monetary authorities are being increasingly forceful in urging various Eurozone countries to implement reforms. Should the clouds on the economic horizon darken further over coming weeks and months, the monetary authorities are at first likely to adjust their current forward guidance for key interest rates. If inflation remains at a low level, the monetary authorities are likely to abandon the idea of a hike in key interest rates. To clarify this position, the ECB could once again highlight in its monetary policy statement that key rates will probably remain at their present levels for an extended period of…

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