Regulation / banks

ECB remains on course

  The European monetary authorities agree that a substantial monetary stimulus is still needed. This is evident from the minutes of the Governing Council meeting of 9/10 September. While the latest economic data, in line with ECB projections, point to a strong recovery of economic activity, there are also significant downside risks. In this context, reference is made to the uncertainty about the further course of the corona pandemic and the increasingly likely no-deal brexit. The ECB will therefore adopt a wait-and-see stance for the time being and analyze further economic data very carefully. At the same time, however, the central bank heads emphasize their fundamental readiness to act should this become necessary in view of the future inflation path. In this context, they also have their sights set on the further development of the euro’s external value. In principle, they are prepared to adjust all available monetary policy instruments….

Central banks in emerging markets are worried

While monetary policy in the industrialized countries is essentially all about keeping interest rates at zero or lower for longer, the world of the emerging markets is much more diverse. On the one hand, interest rates here are usually still noticeably above zero, and on the other hand the Turkish central bank, the guardian of the currency, has recently raised interest rates. In the case of Turkey, this was probably also overdue, as there was a clear threat of a price hike. With inflation rates stubbornly above 10% (y/y) and most recently 11.8%, the key interest rate of 8.25% could not be sustained and even the recent increase to 10.25% should not be enough to push up prices to near the target level of 5.0%. Even stronger guns are needed to achieve this. In the universe of our currency analyses, Turkey clearly stands out with a massive failure to meet…

New Fed targets

New Fed targets Yesterday’s speech by Fed Chairman Powell was eagerly awaited, as he gave clues about the longer-term strategic direction of US monetary policy. On the market side, it was assumed that the Fed would explicitly allow the inflation target to be exceeded. Inflation target has been missed in the past Powell has fully met these expectations. The Fed will no longer be guided by the achievement of a specific inflation rate, but by an average inflation rate of 2% over time. The background to this adjustment is that achieving this target has already caused problems in previous years and inflation has been lower. As part of the strategic review of its monetary policy, which began in November 2018, the Fed examined this issue and has now adjusted its target system as a result. Average inflation – but no precise timing Powell announced at the Federal Reserve Symposium in…

Central banks also have limits

There are also limits for central banks. Key interest rates cannot be lowered at will, as negative interest rates increase the incentive to hoard cash and weaken lending. Tiering systems and crypto-currencies offer a way out here and can shift this limit downwards. In recent years, the central banks have increasingly expanded the monetary policy stimulus and lowered interest rates to zero percent and in some cases even into negative territory. According to the advocates of a negative key interest rate policy (NIRP), the possibility of lowering the key interest rate below the zero percent threshold strengthens the monetary policy transmission process. Compared to a „regular“ interest rate cut, the push into the negative range would allow the monetary policy impulse to unfold its effect via additional transmission channels. However, negative key rates are not a panacea and are not free of undesirable side effects. A study by Brunnermeier and…

Central Bank of Turkey without courage

  Despite the persistent weakness of the lira, the recent meeting of the Central Bank of Turkey ended without new decisions. In the accompanying statement, the monetary watchdogs confirmed the goal of continuing the „underlying trend of declining inflation“. However, a negative real interest rate in the 3.5% range combined with a depreciation of the local currency of almost 9% since the beginning of June against a US dollar that is not exactly bursting with strength at the moment make such lip service appear anything but credible. By exercising restraint, the Turkish central bank has missed another opportunity to regain market confidence, improve the transparency of its monetary policy and rehabilitate the official key interest rate in its steering function for the financial markets. The central bank has officially kept the one-week repo rate constant at 8.25% since May. However, for some weeks now it has been providing domestic financial…

More power for the headquarters

The new EU aid fund – or thMore power for the headquarterse new Recovery and Resilience Facility (RRF), as it was called in the summit’s final document – is to amount to 750 billion euros as proposed by the EU Commission. Over the next three years, the fund will provide EUR 390 billion in grants and EUR 360 billion in loans to member states. To finance this programme, the EU Commission will be authorised to issue its own bonds on behalf of the EU and place them on the capital market. This gives the EU the opportunity for the first time to refinance itself by raising its own loans on the capital market. The debt service for the new EU bonds will then be handled by the EU budget, which in future will also have its own tax revenues: From 2021 a tax on disposable plastics is to be introduced,…

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