Central banks / bond markets

Euroland: ECB inflation target almost reached

In January 2017, pressures on prices in the Eurozone were clearly much more pronounced than expected. The annual rate leapt to +1.8 percent on the heels of +1.1 percent in December 2016. That is the highest figure in almost four years. The rise in EMU consumer prices has thus taken a giant leap towards reaching the European Central Bank’s inflation target of “below but close to two percent”. The annual rate a few months ago was still only just above the zero-percent mark. Only in the last two months have consumer prices dared move into positive territory again – in unusually sharp bursts. The strong rise in inflation can be attributed to energy and food prices, the latter owing to the cold weather in recent weeks. Euroland inflation looks set to remain relatively high in coming months before falling again in the second half. What is behind the high growth…

Lending approvals: Banks more cautious on corporate lending

According to the January ECB Bank Lending Survey (BLS), the banks surveyed tightened their lending standards for loans to corporates in the fourth quarter of 2016. This marks the first net tightening of lending standards since the same quarter in 2013. The net balance of the banks surveyed came to 3% (prior quarter: 0%), whereby the figure describes the difference between the percentage of banks reporting they had tightened lending standards and the percentage of banks reporting they had eased lending standards. In this context, a positive figure indicates that a higher proportion of banks tightened their standards during the period in question. According to the BLS, the main reason for the tightening of credit standards on loans to the corporate sector was banks’ increasing risk aversion. Lending standards for loans to private households for house purchases remained largely unchanged. The net balance of the banks surveyed stood at 1%…

Italy: relegation from Series A

The Canadian rating agency DBRS announced on Friday that it has downgraded Italy’s rating from A (low) to BBB (high), outlook stable. The initial market response this morning saw a slight softening of Italian bonds, but also of other peripheral securities, since the rating change by DBRS had not been expected by all market participants. DBRS justifies the move on the one hand by growing doubts about Italy’s ability to continue implementing structural reforms following the failure to reform the senate. Although the new transitional government enjoys a certain degree of support from the coalition parties, the likelihood of a new election is nonetheless high. Following the constitutional court’s ruling on the electoral law expected for late January, the parties‘ primary focus could be on an election campaign. According to DBRS, the actual date of new elections may not be set until autumn this year. On the other hand, DBRS…

ECB WOULD DO BETTER TO CHANGE ITS KEY INTEREST RATE POLICY SOONER THAN LATER

In July 2012, the European Central Bank (ECB) lowered its deposit rate to zero, and some two years later it became negative for the first time at minus 0.1%. Since then, commercial banks in the eurozone have had to pay „penalty interest“ on surplus liquidity parked at their central bank. Only three months later, in September 2014, the ECB lowered the deposit rate once more to minus 0.2% and then again in December 2015 to minus 0.3% and finally in March 2016 to minus 0.4%. In March of last year, the main refinancing rate was also lowered to zero which meant that the commercial banks in the eurozone were now able to obtain the required central bank liquidity in normal tender operations without having to pay interest on this. Since then at the latest, money market rates and a considerable share of capital market yields in the euro area have…

German cabinet proposes credit brake resolution and refines the residential property credit directive

Just before Christmas, the German cabinet resolved to put the brakes on residential property mortgage finance – and at the same time, is also giving it added momentum. However, while the credit brake will only come into effect once it is actually activated by the German Financial Supervisory Authority (BaFin), the refinements to the residential property mortgage directive are likely to directly eliminate the associated imbalance in property lending. The residential property credit directive which was introduced in March 2016 greatly vexed banks and savings banks, since the transposition of the 2014/17 EU directive into national law was more stringent than the European Parliament had provided for. The creditworthiness assessment regulations provoked the greatest consternation. In accordance with the provisions, the assessment will no longer be based mainly on the collateral of the property to be financed, so that in future, mortgage finance can only be granted if the borrower…

Looking Ahead to 2017 – Corporate Bonds Best Before…

The “best before” date is supposed to give consumers certainty: How long is the minimum shelf life of a product before it needs to be consumed or used in order to avoid its quality or consistency changing, its expected impact dwindling or before it has potentially damaging effects? Users rely on the product’s properties (be it the taste or therapeutic benefits) not deteriorating until after the “best before” date specified by the manufacturer. The words of pundits monitoring monetary policy traditionally also include aspects of the “best before” approach; in the old days this specifically related to interest-rate decisions. With the expanded range of instruments central banks have been able to deploy for some years now, the financial markets in particular now focus on the “best before” dates for monetary stimuli in the form of bond purchases. Within the duration of these purchasing programmes, so the expectation, the monetary excess…

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