ECB

ECB adopts less expansionary course

Mood indicators in the Eurozone are jubilant. Both the purchasing manager indices and the business climate index indicate that the economic dynamic in the Eurozone is set to rise in the coming months. Moreover, this recovery does not seem to be restricted to individual countries. Several EMU member states recently published robust economic signals. In this regard, the upswing in the Eurozone should become more broadly based. The spectre of deflation, which had kept market players and monetary policymakers busy up until the end of the year, is not looming very large following the significant increase in European rates of inflation. The inflation pressure is certainly still low, but recent positive developments with regard to economic and inflation expectations have caused a degree of unease among monetary regulators. At the most recent ECB Council meeting, President Draghi no longer sounded as pessimistic as in the past. In the coming months,…

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…

The German housing market is gradually heating up

The strong surge in housing prices continued in Q1 2016. The prices for owner-occupied homes rose on the year by 4.7 percent, the growth rate in multi-family dwellings was even more pronounced, at 8.0 percent. In the big cities, price increases cooled in the interim but have since picked up again, with owner-occupied flats becoming some 9 percent more expensive.  Neither the fact that prices have already rocketed nor the tangible expansion in residential construction were able to dampen the price hike. Four factors have driven this: Firstly, the basic economic conditions for the housing market are better than at most points in the past. Secondly, the interest rate slide results in lower mortgage payments, despite the increase in house prices.  Thirdly, rental returns that can be achieved in the housing market remain a much-sought alternative to the bond market. And fourthly, housing supply is still tight, as, despite the…

Eurozone likely to face problems after end of ECB purchase programme

The interim conclusion on the PSPP around 14 months after the start of the programme is mixed. Contrary to what had been feared, the ECB has so far always managed to meet its purchase target in full. In spite of its technical success, however, the ECB has not yet met all the aims inherent to the programme. Although lending in the eurozone has risen sharply, inflation is still close to or even below 0%. Medium-term inflation expectations, which are mainly influenced by the trend in the crude oil price, are in fact below the level at the beginning of the PSPP. This was one of the main reasons behind the ECB’s decision to increase the programme volume substantially in March of this year. In contrast, the market-related consequences of PSPP are considerable. Both yields and spreads have fallen sharply in the meantime, while the volatility of bonds has increased. Moreover,…