European Central Bank Warns World Of Drawbacks of Negative Rates (#GotBitcoin)
Comments mark significant shift from previous ECB statements on negative rates. European Central Bank Warns World Of Drawbacks of Negative Rates (#GotBitcoin)
European Central Bank President Mario Draghi signaled Wednesday that the bank is starting to worry about the adverse effects of negative interest rates, a controversial policy tool it introduced almost five years ago to encourage European banks to lend.
The ECB’s change of tone comes after its latest bout of monetary stimulus, announced this month to shore up Europe’s sagging economy, led to fresh falls in eurozone bond yields, piling extra pressure on the region’s weak banks.
Expectations of easier monetary policy in Europe and elsewhere have pushed government bond yields in places like Germany below zero, meaning some governments effectively get paid to issue debt. While a boon for public finances and interest-rate sensitive sectors like housing, this may wreak havoc in other parts of the financial markets.
Negative interest rates force commercial banks to pay to park funds at the central bank. By reducing borrowing costs, they should make it more attractive for companies and households to borrow, spend and invest. The policy also typically weakens an economy’s exchange rate, boosting exports.
But negative interest rates, which are also being deployed by central banks in Sweden, Switzerland and Denmark, come at a cost to commercial banks and weaken interest income from loans and holding safe assets. The policy has also raised the risks of housing bubbles in parts of Europe, by propping up interest-rate sensitive sectors such as real estate.
Speaking at a conference in Frankfurt, Mr. Draghi said the ECB would, if necessary, look for ways to maintain the positive impact of negative rates for the economy “while mitigating the side effects, if any.”
The ECB would continue to monitor how banks can “maintain healthy earning conditions while net interest margins are compressed.”
European bank stocks jumped after the comments were published, with Italy’s UniCredit SpA and Deutsche Bank AG both up around 4%.
Mr. Draghi’s comments represent a significant shift from previous ECB statements that negative rates are on balance positive for bank profits because they stimulate the region’s economy.
They suggest the ECB could consider action to mitigate the impact of negative rates on banks, a step already taken by some of its peers including the Bank of Japan, which attempts to control the yield on 10-year bonds. The Swiss central bank exempts a certain amount of deposits from its negative deposit rate. One option for the ECB is to introduce a tiered deposit rate, which would shield a part of banks’ deposits from the charges.
Bank executives have complained for years that negative rates curb their profits because they can’t fully be passed on to customers.
Casting doubt on negative rates could be risky for the ECB if investors interpret it as a sign that the central bank doubts its own strategy.
Earlier this month, the ECB responded to Europe’s recent economic slowdown by signaling it won’t raise its key eurozone interest rate, currently set at minus 0.4%, before next year.
With ECB rates expected to stay where there are for many months at least, central banks outside the eurozone, like Switzerland and Denmark, are expected by economists to delay any rate increases, leaving open the prospect of negative interest rates for years to come.
One argument supporting the policy is that it gives central banks more room to respond to ultralow inflation or deflation. Policy makers can stimulate the economy by setting interest rates below the inflation rate. Zero had long been seen as a floor on policy rates, but by moving below zero in recent years, central banks shattered that taboo.
Although the Federal Reserve took interest rates close to zero in the aftermath of the financial crisis, it didn’t cut rates to below zero. It did embark on large-scale bond purchases which, like negative rates, reduce long-term borrowing costs. In recent years, the Fed has slowly increased interest rates, though it has signaled it will pause, with the fed-funds rate at a range of 2.25% to 2.5%.
European bank stocks have fallen since the ECB’s decision three weeks ago, and are down around 30% since the start of 2018. U.S. banks have fared better in recent years.
Mr. Draghi’s comments suggest the ECB could consider action to mitigate the impact of negative rates on banks, a step already taken by some of its peers, including the Bank of Japan and the Swiss central bank, which exempts a certain amount of deposits from its negative deposit rate. One option is to introduce a tiered deposit rate, which would shield a part of banks’ deposits from the charges.
That could ease the way for fresh ECB interest-rate cuts if the economy doesn’t improve. “We are not short of instruments to deliver on our mandate,” Mr. Draghi said. The ECB targets annual inflation of just under 2%. It is currently 1.5%.
Still, some officials consider European banks themselves are largely to blame for their poor performance, and that the ECB’s negative bank-deposit rate isn’t a game changer for bank profits. They point to Danish banks, which are doing well despite negative rates.
Mr. Draghi insisted Wednesday that “low bank profitability is not an inevitable consequence of negative rates.”
Rather, successful banks have been able to reduce costs and invest in information technology while diversifying their businesses, he said.
Ten-Year Yield Drops Below 2.4%, Stocks Fall
Treasury yields continue to slip as share benchmarks turn lower.
U.S. stocks fell Wednesday, sliding again alongside Treasury yields as worries lingered about the health of the global economy.
Although caution from the Federal Reserve and optimism about a U.S.-China trade agreement have supported the market recovery early in 2019, anxiety about slowing economic growth has stoked fresh volatility in recent sessions.
The Dow Jones Industrial Average was recently down 65 points, or 0.3%, at 25595 after opening slightly higher. The S&P 500 fell 0.4%. The benchmark equity gauge snapped a two-session losing streak Tuesday and has rebounded more than 11.5% so far this year. The tech-heavy Nasdaq shed 0.6%.
Stocks slid last week after a measure of the yield curve, the gap between short- and long-term Treasury yields, inverted for the first time in more than a decade.
U.S. Treasury yields, which fall as bond prices rise, slipped again Wednesday, with the 10-year Treasury yield dropping to 2.38% from 2.418% a day earlier. Tuesday’s close marked its lowest since December 2017.
In the past, the 10-year Treasury yield falling below the 3-month yield has preceded recessions. But major indexes have also often risen for several months following such inversions, another factor muddying the economic backdrop after a stretch of mixed data and lockstep rallies in stocks and bonds.
“It’s confusing because we’re not fortunate enough to be in a global synchronization around the world when it comes to economic growth,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. “That’s causing a lot of inconsistencies and discrepancies across asset classes.”
With economic growth expected to slow, nearly 75% of investors now expect the Fed to lower interest rates at least once in 2019, up from 34% a week earlier, CME Group data show.
“Everybody is talking about the yield inversion,” said Mariann Montagne, a portfolio manager at Gradient Investments. “Based on history, we get another year and a half or so before recession.”
However, a year and a half is a long time in markets, she said. “Successful trade talks [between the U.S. and China] could change that outlook. Agreements don’t have to be perfect. Any progress whatsoever would help.”
Talks between the world’s two largest economies to resolve their monthslong tariff fight are set to continue this week in Beijing and next week in Washington. Some investors are holding out hope that an agreement could boost the outlook for economic growth, easing some pressure on central banks around the world.
After the Fed lowered its 2019 U.S. economic growth forecasts last week and signaled it is now unlikely to raise rates at all this year, European Central Bank President Mario Draghihinted Wednesday that the bank is starting to worry about negative interest rates, a controversial policy tool introduced almost five years ago.
The comments came after a fresh bout of policy stimulus announced by the ECB earlier this month to support the struggling eurozone economy.
Some analysts are wary that slowing economic growth will curtail earnings growth moving forward, limiting stock-market gains. Profit growth for S&P 500 companies is expected to slow this year and fall in the first quarter from a year earlier.
Southwest Airlines said Wednesday it expects lower sales in the current quarter as a result of 9,400 flight cancellations and tepid demand. Shares still added 1.5%.
Elsewhere in individual stocks, WellCare Health Plans surged 8.7% after health insurer Centene agreed to buy the company for around $15.3 billion. Centene shares fell 9/2%.
Home builder Lennar climbed 4.1% after it said the housing market slowdown has reversed course with mortgage rates falling.
European stocks edged lower, with the Stoxx Europe 600 falling 0.2%. Volatility in Turkish markets continued ahead of local elections later this week, with the Turkish lira falling against the dollar and the country’s main stock index sliding more than 5%.
Andrew Bailey Says BOE Is Doing The Right Thing With Near Negative Interest Rates
Governor Andrew Bailey said the Bank of England’s main job is to help the U.K. weather the coronavirus, but it’s OK if the government also benefits from ultra low interest rates.
The central bank’s aim is to “support the economy as best as possible through this unprecedented shock,” Bailey told a webinar hosted by students at the London School of Economics on Friday. He said the bank’s independence isn’t threatened by moves that reduced borrowing costs, giving the Treasury more room for maneuver on fiscal policy.
The comments justify the bank’s decision to more than double its target for purchases of government bonds to 875 billion pounds ($1.2 trillion). That intervention kept U.K. debt servicing costs below pre-virus levels even as Chancellor of the Exchequer Rishi Sunak oversaw a record amount of borrowing to fund emergency aid for companies and workers.
Some critics have suggested that the BOE has compromised its operational independence and is directly financing the government’s aims. Those “arguments are entirely without merit,” Bailey said, noting that the BOE doesn’t calibrate its asset-purchase plan to match the ambition of politicians.
“In a world where the government has to manage the task of spreading the cost of the pandemic which would otherwise fall on individuals at great cost to them,” it is “hardly surprising, and indeed consistent, that the government should be able to benefit from those financing conditions,” he said.
Bailey said that the true test of independence may come when officials decide to tighten policy. The BOE, he said, will do the right thing, because otherwise it would be in breach its remit and lose credibility with markets.
“The interventions we have made are effective because the bank is independent, and because we will reverse these actions when conditions require that,” he said.
In the speech, which looked at the challenges facing the modern central bank, Bailey also said the U.K. faces a period of below-target inflation. Inflation-targeting regimes must adapt during times of shock, he said.
Earlier, Hong Kong’s Hang Seng gained 0.6%, while Japan’s Nikkei 225 slid 0.2%.
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