The markets’ reaction to the ECB’s measures was heavily influenced by Draghi’s signals that the downward motion of rates is reaching frontiers that the central bank is reluctant to cross. These signals, and the launching of the TLTRO II programme, indicate that the ECB has started to worry about the negative repercussions on the profitability of banks, and of the risk of monetary stimulus producing perverse effects….<\/p>\n
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Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy<\/strong><\/span><\/a> <\/strong><\/span><\/a><\/span><\/p>\n Intesa Sanpaolo – Research Department For professional investors and advisers only<\/strong><\/p>\n On Thursday, 10 March, the ECB announced a broad and diversified set of monetary policy measures, which exceeded expectations: policy rates were cut, purchases under the APP programme were stepped up from 60 to 80 billion euros a month, corporate bonds were included in the pool of purchasable financial assets, and a TLTRO II programme was launched, with a rate-based incentive system. All the same, the markets reacted to the announcement as if the ECB had disappointed expectations: at the end of the session the EUR\/USD exchange rate was almost 200 pips higher than in the morning, having entirely made up all the ground lost since mid- February; government bond yields were above the previous day’s levels, and the EuroStoxx index, which had initially risen, driven by financial stocks, ended up posting a sharp decline.<\/p>\n A note of caution: monetary policy measures should be assessed for their effects on the economy, and not based on the impact reaction of investors (or of the part of investors who react on impact), which may prove rather ephemeral. Having said this, it is obvious that the trend reversal came about when Draghi signalled that rates are unlikely to drop further, by saying, for instance, that the choice not to introduce a multi-tiered system of negative rateswas also prompted by the need to prevent paving the way for unlimited cuts, and to shift focus to non-rate measures. Despite assuring that, in principle, rates may be cut further if needed, and reasserting the promise to keep them stable beyond the termination of the APP programme, expectations for more aggressive negative rates prevailed. By no coincidence, the strongest reaction was observed on the short end of the curve.<\/p>\n A further doubt concerns the relevance of the measures geared to relaunching growth – which, as Draghi himself acknowledged, is currently the key factor in guaranteeing the recovery of inflation, rather than a mechanical increase in base money. The increase in the volumes of monthly purchases under the APP programme, and the deposit rate cut, should guarantee marginally favourable financing conditions for businesses, governments and households, at least for a year, and at least for the credit condition component, which is tied to interest rates. The opening of a purchase programme on corporate bonds could guarantee even more generous financing terms than the present for issuers, although, notoriously, this has by no means affected investment growth in the past few years; besides, it could also indirectly force bank lending rates down.<\/p>\n The announcements made on 10 March, and in particular the assurance that rates will no longer be cut aggressively, and the launching of the TLTRO II programme, may help contain some concerns created by past monetary policy measures, as a result of their negative impact on the profitability of European banks. There are greater doubts on the fact that the TLTRO II programme may stimulate an actual acceleration of the credit trend, currently affected most of all by demand factors, and by the constraints imposed by stricter banking sector regulations. However, the programme seems designed in such a way as to offer participating banks tangible savings compared to the issue of bonds of corresponding maturity, and to prevent recourse to the programme being perceived as an element of weakness.<\/p>\n What if all this doesn’t work? The ECB has assured that its toolbox is not empty yet. However, after scarping the barrel once again, there is little else that can be done in the realm of the less unorthodox non-standard measures. And the activation threshold of more effective, but much less unorthodox instruments, such as the direct transfer of money to private operators, is surely very high.<\/p>\n <\/p>\n Source: BONDWorld.ch<\/p>\n","protected":false},"excerpt":{"rendered":" The markets’ reaction to the ECB’s measures was heavily influenced by Draghi’s signals that the downward motion of rates is reaching frontiers that the central bank is reluctant to cross. These signals, and the launching of the TLTRO II programme, indicate that the ECB has started to worry about the negative repercussions on the profitability […]<\/p>\n","protected":false},"author":2,"featured_media":3723,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"telegram_tosend":false,"telegram_tosend_message":"","telegram_tosend_target":0,"footnotes":"","_wpscp_schedule_draft_date":"","_wpscp_schedule_republish_date":"","_wpscppro_advance_schedule":false,"_wpscppro_advance_schedule_date":"","_wpscppro_dont_share_socialmedia":false,"_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_google_business_share_type":"","_selected_social_profile":[],"_wpsp_enable_custom_social_template":false,"_wpsp_social_scheduling":{"enabled":false,"datetime":null,"platforms":[],"status":"template_only","dateOption":"today","timeOption":"now","customDays":"","customHours":"","customDate":"","customTime":"","schedulingType":"absolute"},"_wpsp_active_default_template":true},"categories":[50],"tags":[],"class_list":["post-1930","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-weekly-analysis"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":6}},"_links":{"self":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/1930","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/comments?post=1930"}],"version-history":[{"count":0,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/1930\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media\/3723"}],"wp:attachment":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media?parent=1930"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/categories?post=1930"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/tags?post=1930"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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