Central banks / bond markets

Inflation rate in the Eurozone: Easter drives inflation – peak for the year most likely reached

The rate of inflation in the eurozone is once again gaining momentum. According to preliminary data, the annual rate is +1.9% in April and therefore again approaching the ECB’s target level of “close to, but below, 2%”. However, the figure for April is not an indication of growing price pressure in the currency union. Rather, the increase is attributable to the “Easter effect”, which is particularly reflected in the sharp rise in the core rate. Going forward, the price pressure is for the time being likely to be on a downward trend again as the year progresses, especially because the strong upswing in energy prices can be expected to slow down, provided that there are no unexpected hikes in the oil price. As a result, the pressure on the ECB to justify its actions is likely to fall for the moment. However, it is worth noting that the less volatile…

ECB’s monetary policy is heightening the pressure on banks

The monetary measures of the European Central Bank (ECB) are increasingly burdening the profits of banks in Germany and Europe. This is revealed in the ECB’s Bank Lending Survey for April on the lending business of banks. While the extended asset purchasing programme of the Eurosystem has directly or indirectly improved the liquidity position and financing conditions of banks in the last six months, the improvements in Germany resulted primarily from clients‘ cash asset reallocations into bank deposits and to a lesser extent from the sale of banks‘ own securities. However, a significant majority of the institutions surveyed in Europe also reported contracting net interest margins and a deterioration in the overall earnings situation of banks. The reduction in lending rates, boosted by the asset purchasing programme, has particularly contributed to this development. The average European effective interest rate on new business with corporate clients fell in February to a…

Markets becoming increasingly dependent on the ECB

Since the spring of 2015, the ECB has been purchasing assets within the framework of its frequently-adjusted asset purchasing programme that has meanwhile reached a volume of nearly 1,772 billion euros. Since this month, the monthly purchasing volume has been tapered from 80 to 60 billion euros. The ECB has stated that the purchases will continue until the end of December 2017 at least, with an extension not only possible but also very likely. Given the growing problems on the capital market as a result of the asset purchasing programme, the central bank would be advised to start preparations for the exit sooner rather than later. A number of market segments are showing signs of liquidity bottlenecks and market distortions. With its persistently high demand, the ECB has put markets in a state of dependence which will be difficult to end without creating withdrawal symptoms. This is evident from a…

ECB has scope to reduce the stimulus

Since ECB boss Draghi hinted at the March interest rate meeting that the central bankers considered adjusting their forward guidance, speculation has risen about how and whether a reduction of monetary policy stimulus could be implemented. Excess liquidity in the Eurozone has meanwhile increased to more than EUR 1.5 trillion, partly due to ECB bond purchases, and will rise further to hit the EUR 2 trillion mark as the program continues. Central bank liquidity in the market is nevertheless distributed very heterogeneously among the various euro countries. More than 70% of excess liquidity is concentrated at German, French and Dutch banks. German commercial banks hold significantly more central bank liquidity at the Bundesbank than they demanded as part of tender operations or has accrued to them as part of bond purchases.  This means in turn that German commercial banks are affected to a much greater degree by the negative deposit…

ECB adopts less expansionary course

Mood indicators in the Eurozone are jubilant. Both the purchasing manager indices and the business climate index indicate that the economic dynamic in the Eurozone is set to rise in the coming months. Moreover, this recovery does not seem to be restricted to individual countries. Several EMU member states recently published robust economic signals. In this regard, the upswing in the Eurozone should become more broadly based. The spectre of deflation, which had kept market players and monetary policymakers busy up until the end of the year, is not looming very large following the significant increase in European rates of inflation. The inflation pressure is certainly still low, but recent positive developments with regard to economic and inflation expectations have caused a degree of unease among monetary regulators. At the most recent ECB Council meeting, President Draghi no longer sounded as pessimistic as in the past. In the coming months,…

Target2 balances harbour substantial fiscal risks

Another perceptible increase in Target2 balances has been apparent in the Eurozone for months. While this trend is caused primarily by the PSPP and less by acute capital flight, as was the case in 2012, public discussion is focusing, above all, on the risks to creditors and debtors. The financial risks, which would arise – hypothetically speaking – from a withdrawal from the EMU by a country with substantial Target2 liabilities, such as Italy, would be quite considerable. Should the country withdrawing from the EMU not settle the debts, the ECB’s financial buffer, as the creditor of the receivable, would be scarcely sufficient to absorb the loss. Although the ECB can operate even with negative equity, the national central banks as shareholders would intervene, but the risk buffer of all banks would not be sufficient to absorb the loss. While the Bundesbank and the Banque de France have a sufficiently…

1 18 19 20 24