David F. Lafferty (Natixis) | Christine Lagarde’s appointment was somewhat of surprise where few economists predicted her to take the helm of the ECB. This gives some indication of how complex the negotiations were for the new EC governing positions.
ECB monetary policy
“Beyond our scepticism about the ability of new stimulus measures to drive the economy, we recognise that the ECB is obliged to act which will create a situation unfavourable for its inflation targets,” analysts at Intermoney point out. In this scenario, we consider that the reactivation of asset purchases with certain adjustments (based on the reality of German debt) would be the measure with the greatest positive impact, more so than interest rate cuts. Nevertheless, if the second path is explored, it would be accompanied by measures to mitigate the effect of negative rates on the banking sector.
The European Central Bank will have to relax its monetary policy again, possibly through further reductions in interest rates or the purchase of assets, if inflation in the eurozone does not meet its target. Chairman Mario Draghi underlined that the ECB’s the limits are flexible because the its legal powers allow it to deploy tools that are both “necessary and proportionate”.
Banca March | The ECB announced other limitations on liquidity that will make it difficult for peripheral banks to access the new TLTRO III.
“There is no probability of deflation, there is very low probability of recession, there are no threats of de-anchoring of inflation expectations,” Mario Draghi said on Thursday. The governor of the European Central Bank announced once again – as he did in March – that it will delay the rate hike at least until 2020 and kept all options open, especially in case economic prospects deteriorate. ECB’s decision is in line with those of other central banks in the world. The Fed has just opened the door to a rate cut, something that Australia and India have already done.
José Ramón Díez Guijarro (Bankia Estudios) | Fortunately, in the EMU, with the exception of the second half of 2014, when the expected inflation expectations traded by the five year German bond reached negative territory, this deflation risk seems much more contained. This could be the principal difference between the European and Japanese economies.
The biggest economic threat today is not the interest rate, nor the exchange rates, nor the possible trade war fuelled by Trump: it’s the debt accumulated by countries across the world. This has increased 12% of GDP since the crisis, totalling 225% of global GDP. Starting with China, followed by Europe and ending up with the US, the threat from the current and future debt is terrifying.
The central banks are still powerful. They can make the financial markets rise or plunge them into the doldrums. But the CBs need to scrutinise the financial system and its systemic risks more closely.
The non-banking sector in Europe currently accounts for 54% of total assets versus 42% in 2008. But interestingly, it’s in Germany and Spain, amongst the big countries, where banks maintain their weighting in absolute terms and in relation to their products.
The European Central Bank (ECB)’s non-conventional measures contributed 1,7 percentage points to Spain’s real GDP growth between 2014 and 2016, while also helping to cut the public deficit by 1,9 percentage points over the same period.