Regulation / banks

Capital market yields on both sides of the Atlantic likely to tend moderately higher over the year

The European monetary watchdogs have meanwhile returned from their summer breaks and confirmed the direction of monetary policy. Starting in October, monthly bond purchases under the ECB’s asset purchasing programme (APP) are to be reduced to EUR 15bn, with net new purchases expected to be concluded by the end of the year. Even if this means that the European central bankers are taking another small step towards monetary normality, the monetary stimulus is still far-reaching. The ECB’s forward guidance shows that key interest rate hikes are not an issue for the time being. We only expect the ECB to allow the deposit rate to carefully head upwards over the year as a whole. We do not envisage the first „real“ interest rate hike being made before the end of next year at the very earliest. While the ECB monetary watchdogs are clearly finding it hard to seriously depart from their…

Central banks proceeding in a very orderly manner

Compared to the political sphere, developments at the most important central banks are proceeding in an orderly fashion. Nor is this likely to change in the next few months. The European monetary watchdogs recently reset the stage for the further course of monetary policy. Worthy of note in this context is the fact that under current conditions the key rate is to remain unchanged until through the summer of next year. This leaves the ECB’s monetary policy in autopilot mode. Only the “Target2” topic has been the object of controversial debate recently. However, this debate focusses on the wrong points. The liability risks should be placed less to the fore than the question of how confidence in the periphery states can be restored again. On the other side of the Atlantic the Fed’s monetary policy is also likely to continue to proceed in a very orderly manner. The US monetary…

Money market reform focused on safety rather than term premium

Time is pressing – that is the unanimous opinion of the working group for a risk-free reference interest rate in the Eurozone. The current overnight reference interest rate in the Eurozone, the Eonia (Euro OvernIight Index Average), may only be used for new contracts until the end of 2019 and after that for existing contracts, if need be. The ECB considers ESTER (Euro Short-TErm Rate) to be the hottest succession candidate, even if the decision on this has yet to be passed. However, ESTER is trading at an average nine basis points lower than the Eonia which could hamper the transition. While a spread on ESTER that, for example, declines over time would ease the reference interest rate transition, conceptual simplicity and the tight time frame argue for a clean cut. Unlike Eonia, Euribor (Euro InterBank Offered Rate) could continue as a benchmark beyond 2019, but this does not mean…

German banks tightening credit guidelines for corporate customers

As revealed in the current Bank Lending Survey evaluation for July, a small majority of the institutions surveyed would like to introduce stricter guidelines for granting loans to corporate customers in the months ahead. This will affect both small and medium-sized enterprises as well as large enterprises. By tightening their credit guidelines for the first time since April 2015, banks are responding to the current economic slowdown. The deceleration in economic growth to be feared for this year and next can be largely attributed to the international trade disputes as well as other geopolitical risks. The strongly exporting German SMEs and large-scale corporates would be particularly affected by a further escalation of protectionist measures. However, there is no reason at this juncture to fear a slump in loan granting to corporate customers: on the one hand, only a small majority of banks have so far planned to tighten their credit…

Fed Chairman confirms current monetary course

Yesterday’s hearing of Fed Chairman Jerome Powell as part of the six-monthly monetary policy report before the Senate’s banking committee was eagerly awaited. In his opening speech, Powell was optimistic about the economic development. He believes that the solid growth rate this year so far is attributable to several factors: robust job growth, rising after-tax incomes and optimism among private households. Backed by a strong labour market, inflation close to the two percent target and balanced risks for the growth outlook, the FOMC considers further interest rate hikes to be the best monetary course – at least for now. Powell’s parenthetical „for now” can be interpreted to mean that the course of monetary policy has not been switched to autopilot. In other words, key interest rates will not be raised as a matter of course but in consideration of the current underlying conditions. More interesting than the prepared opening speech…

Protectionist policies at the cost of growth and prosperity

More and more countries throughout the world are pursuing a protectionist policy. If this development prevails, it would put an end to globalisation. The era of low interest rates would come to an end and inflation would accelerate. In short: protectionist policies are at the cost of growth and prosperity. World-wide we are currently witnessing a revival of protectionist forces. Populist movements are gaining influence in many countries, often relying on nationalist ideologies and propagating economic and social isolationism. The battle against globalisation is a central theme shared by populists from different countries. US President Donald Trump is a prime example in this regard, but he is by no means alone. In large parts of Europe similar positions are also gaining ground. And where populists are not yet already part of government, they are often setting the parameters of political debate. Yet it was globalisation that decisively shaped the economic…

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