Central banks / bond markets

DZ BANK Research Outlook for 2017

Fiscal policy will stimulate the global economy, but growth will remain fragile / central banks not more expansionary / stock markets with moderate upside potential The global economy will only slowly pick up pace in 2017. It will be bolstered by increasing fiscal-policy stimuli. Inflation will edge up above all owing to the energy-price-related baseline effect. Thus, there will be no talk of an even more expansionary monetary policy. Interest rates will remain very low, especially in the Eurozone. The existing lack of appealing investment opportunities in combination with the global economy’s slightly brisker growth will also boost the stock markets. The DAX should close 2017 at around 12,000 points. The global economy is estimated to grow by 3.0 percent in the coming year, whilst 2.8 percent is expected in the current year. Growth worldwide continues to not be very dynamic. Some countries will try and use fiscal programmes to…

Financial stability given the stress of low interest rates

The Financial Stability Report recently published by Deutsche Bundesbank can be read to say that there is no acute threat to financial stability at present, but there are indeed a series of risks that bear monitoring. We share this assessment. From our viewpoint, the extremely low interest rates (for which the ECB is partly responsible given its monetary policy) are among the single greatest dangers to the stability of the financial markets in both Germany and Europe. The consequences of low interest rates include massive forfeited interest income on the part of citizens, something that makes establishing provisions for old age difficult. Another impact is the huge bottleneck in financial investments that can be seen from the fact that already one quarter of private monetary assets are parked in sight deposits and cash. Life insurers are also busy hunting for profitable investments, and are finding it ever harder to generate…

Is there a future for European banks?

The weakness of the European banking sector appears to be centering on Germany at the moment. Last week, two of our banks stood in the focus of market happenings. What must happen for the situation in the European banking sector to stabilize and improvement to become possible in the medium term? Huge upheavals were sparked off at Deutsche Bank when the US Ministry of Justice announced that the bank could face a 14 billion dollar fine. Commerzbank has announced yet another restructuring in order to strengthen its profitability. But the burdens on European banks are not merely confined to Germany. All EU countries are affected by this. Three factors are essentially responsible for the burdens facing European banks – low interest rates, regulatory requirements and the new rivals, known as the FinTechs. In Germany, the burdens are compounded by the existence of too many banks. This can be attributed to…

Central banks – when the exception becomes the monetary policy rule

Almost a decade after the start of the financial market crisis, the big industrialised nations still find themselves in an exceptional situation when it comes to monetary policy. In view of weak economic growth, ongoing disinflation and shocks exogenous to the market, such as the Brexit vote, three of the four major central banks are relying on “extraordinary” monetary policy measures – the ECB, BoJ and BoE. Criticism has been voiced that the central banks’ decision to take extremely expansionary measures is not purely the result of external circumstances. The central banks’ asymmetrical response functions (to economic cycles) are also said to have favoured these developments. The duration and scope of QE measures mean that they hardly deserve the attribute of “extraordinary” any longer. Instead, it looks like they might become the new monetary policy rule. The US central bank already stopped taking unconventional measures two years ago. Nonetheless, the…

The ECB’s monetary policy undermines reform incentives in the periphery

Euro area governments and the ECB are not pulling together. On the basis of its mandate and according to its own official statements the European Central Bank’s policy is aimed at guaranteeing monetary stability. In order to ward off the danger of deflation in the Euro area, the ECB is pursuing a highly accommodative policy, but this is enjoying ever less support from the national governments in the form of the implementation of structural reforms. Especially the periphery states are facing growing internal political resistance, which is clearly eroding their readiness to implement reforms and impose austerity measures. At the same time, the former crisis states are benefiting from the fact that the risk premiums on EMU government bonds are distorted to the downside because of the ECB’s policy and the incentive for commercial banks to hold government bonds. Given their high levels of debt these countries have an interest…

Target2 balances are drifting apart once more due to the ECB’s bond purchase programme

In recent months, the Target2 balances of the different Eurozone countries have been drifting apart continuously. The Target2 amounts due to Germany, Luxembourg, Finland and the Netherlands now total around EUR 950bn. In contrast, the central banks of the European periphery, in particular, have accumulated substantial liabilities to the Eurosystem. However, this is by no means a new phenomenon. A comparable trend was apparent in the period from July 2011 to August 2012 when capital fled the EMU periphery. The factor driving this development has, however, changed over time. The assumption is that the present rise in Target2 balances is closely associated with the ECB’s bond purchase programme, which has been in place since March last year. Accordingly, the rise in the positive Target2 balances in Germany, Finland, Luxembourg and the Netherlands is comparatively closely linked to the rise in the ECB’s bond portfolio. Both indirect and direct effects on…

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