Central banks / bond markets

The EU in an identity crisis

At the latest since the Brexit vote, the EU has been in an existential crisis. The 27 member states that will remain after a UK exit in approx. two years’ time are tussling to come up with a coherent strategy for how the EU should be structured in future. However, the opinions as to what changes are necessary and what form they should be given diverge greatly. The main bone of contention is whether the convergence criteria should in future be relaxed. France and Italy are spearheading the member states that want to see government-driven economic policy. The German federal government is of the opposite opinion. There are also differences on the question of whether there should be greater EU integration. While the individual member states predominantly insist Brussels should now shed competences, the EU Commission prioritises more integration. A key institutional problem the EU faces is that its citizens…

The knee-jerk reflex of the financial market

The familiar knee-jerk reflex is quite simple: if the patellar ligament is tapped lightly, the lower leg lifts. The international central banks are behaving in much the same way at present. Something extraordinary happens, the current case being Brexit, and after a short period, there are vociferous promises by central banks to further ease monetary conditions in the near future. This was the case yesterday when the Bank of England announced that it would cut interest rates in the near future as a precautionary measure and the ECB announced that it would shortly amend the terms of its public sector purchase programme. In future the purchase key could be based on market capitalisation and not on countries’ shareholdings in the ECB. This could imply that the level of a country’s debts determine the share of the bonds to be purchased under the ECB’s purchase Programme. The capital market also reacted…

BVerfG gives the green light for OMT

The German Federal Constitutional Court (BVerfG) rejected the complaint brought before it against the ECB’s OMT programme, declaring the suit filed to be in part “inadmissible” and in part “unfounded”. Moreover, in the opinion of the court, the “rights and duties of the German Bundestag including its fundamental responsibility for budget policy have not been impaired.” The Karlsruhe court thus followed the European Court of Justice (ECJ), which ordained in its ruling of 15 June 2015 that the ECB’s OMT programme was compatible with European law under the conditions and constraints stated at the time. Although the BVerfG again expressed substantive reservations as regards the OMT, these were not so severe as to require the court to deviate from the principle that European law must take precedence over national law. Today’s judgement by the BVerfG is unlikely to have surprised many market players. Following the ECJ’s judgement last year the…

The bond markets in the Eurozone are grossly overpriced

There are growing signs of a marked increase in inflation in the Eurozone. It will not be long before the consequences of this are felt. Soon afterwards there could be a noticeable rise in yields. Yields on 10-year German Bunds dropped below 0% for the first time ever this week. This time the renewed decline in yields was not sparked off by the European Central Bank (ECB) launching a fresh programme of sovereign bond purchases but by mounting concerns over Brexit. Latest opinion polls reveal a sizeable gain in the number of supporters for Great Britain’s exit from the European Union. They now have a lead and thus Brexit is perceived as a possibility. All investment vehicles responded negatively to this development. But yields on Bunds were already at a very low level of only 0.05 percent even before this. It would be unfair, however, to apportion the blame for…

Negative key interest rates: A monetary game of dice

In the aftermath of the financial crisis, an ever increasing number of experiments were carried out to make monetary policy more expansionary. Negative key interest rates are the latest beacon of hope. More and more central banks are introducing negative interest rates to promote lending and thereby inject life into the economy and nudge up inflation. But now a serious economic debate has flared up between central bank representatives and international economic thinktanks over whether these goals can actually be achieved. Over the long term, negative key interest rates involve many risks of producing the exact opposite of what central bankers hope to achieve. 1.) Private households are hoarding cash Negative interest rates are not being passed on to private households anywhere in the world at present. Yet, the longer the era of negative interest rates persists, the greater the pressure to do precisely this. The danger exists of cash…

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