Central banks / bond markets

ECB: Hope clings on

At yesterday’s meeting of the Governing Council of the European Central Bank, ECB representatives resolved upon a number of measures to ensure that financial parameters remain favorable for the foreseeable future. The forward guidance for the development of interest rates was modified to the extent that the key refinancing rate will remain at its level at least until the end of this year – whereas up until now an increase in the autumn had been indicated. As we expected, ECB representatives launched a new series of Targeted longer-term refinancing operations (TLTRO III). This new long-term tender program is to be offered on a quarterly basis over the period September 2019 to March 2021. The TLTRO III will have a term of two years in each case; the rate of interest payable will depend on the key refinancing rate. Just like the existing TLTRO II, the new tenders will feature built-in…

Turkish central bank remains steadfast

The Turkish Central Bank (TCMB) recently decided to leave key interest rates unchanged at 24%. Probably even more important was the renewed confirmation of the bank’s intention to keep to its tight monetary course „until the inflation outlook shows a marked improvement“, with „further monetary tightening being delivered”, if necessary. With the local elections due to take place at the end of this month, the recent decision should generally underscore the central bank’s reputation. Although monetary independence in Turkey is not quite as strong as in the US, the UK or EMU, efforts to counter the continuing price pressure appear to be high on the central bank’s agenda. All in all, the recent decision of the Turkish Central Bank represents a positive development for Turkey. A politically independent central bank is a valuable asset for a country, and attempts to damage or restrict this independence usually create greater reluctance on…

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…

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