The ECB has increased its key deposit rate – or how much interest it pays on deposits - to 0.75% from 0% and lifted its key refinancing rate – or how much banks have to pay when they borrow from the ECB - to 1.25% from 0.5%.
"Price pressures have continued to strengthen and broaden across the economy," said the ECB.
"I cannot reduce the price of energy," said the president of ECB Christine Lagarde.
"I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market. And I am very pleased to see that the European Commission is considering steps to that effect because monetary policy is not going to reduce the price of energy," she continued.
Lagarde added that if gas prices continue to "skyrocket", a recession would be on the horizon. If Russia were to fully cut gas supplies to the European Union and it becomes impossible to secure alternative gas supplies from the US, Asia or Norway, the ECB expects gas rationing across the Euro area and a recession in 2023.
Energy prices, which were up 26% compared to a year earlier, remain the key driver behind the jump. However, increases for food, services, and imported goods were also notably above the EBC’s overall 2% inflation target.
As the economy began to recover from the initial shock of the pandemic last year, price growth took off, catching the ECB off guard.
Supply-chain bottlenecks reducing the availability of consumer products also added to the upward pressure. Meanwhile, after lockdowns forced them to save up disposable incomes for several months, many households are now spending widely on everything from restaurant meals to new vehicles.
Many of these inflation drivers are temporary, meaning price pressures will likely ease off gradually. The ECB predicts inflation will return to below 2% by the end of this year. However, this is a prediction questioned by a number of policymakers who believe above-target inflation readings could persist into 2023.
Following a Thursday meeting of its Governing Council to determine monetary policy decisions, the European Central Bank has announced that it will enlarge its emergency bond-buying programme by €600 billion in a further effort to help European economies weather the damage caused by the COVID-19 pandemic.
“The envelope for the pandemic emergency purchase programme (PEPP) will be increased by €600 billion to a total of €1,350 billion,” the ECB wrote in its statement on the meeting.
“In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households.”
In further measures, the ECB declared that purchases under the programme will continue until the end of June 2021 at the earliest. Interest rates remain unchanged.
The scale of the move has taken investors by surprise. Ulas Akincilar, INFINOX’s head of trading, described the move as ECB chief Christine Lagarde “firing the Euro bazooka”.
Despite the new stimulus measures, the stock surge that followed had little momentum, and most indexes returned to normalcy ahead of US markets opening on Thursday. The FTSE 100 and DAX were each down by 0.6%, and the CAC 40 by 0.3%.
The European Central Bank’s (ECB) recent programme of quantitative easing, purchasing bonds in the open market, has had a profound impact on markets in Europe, even before the purchases began, believes international investment firm, Baring Asset Management.
Over the past few months, European equity markets have rallied, while both bond yields and the euro have fallen to historic lows. The euro weakness has had a significant positive impact on European exporters in particular. However, these market movements are not only down to quantitative easing. Economic data in Europe has been improving recently, and sentiment around European assets has improved considerably.
“Over the past six months we have undertaken a significant shift in the [Baring Euro Dynamic Asset Allocation Fund]. In August last year, we had 25% of the fund in US equities, with very little in Europe; we now have no US equities and nearly 30% in European equities. Our European position also includes a 10% allocation to European small caps which we believe will benefit from the more positive economic environment indicated in the recent economic data,” said Hartwig Kos, Investment Manager, Baring Euro Dynamic Asset Allocation Fund.
Having celebrated its second anniversary in March, the Baring Euro Dynamic Asset Allocation Fund has returned 10% since inception on an annualised basis, and 21.55% on a cumulative basis, outperforming the three-month EURIBOR +3%p.a. which has delivered a return of 3.2% and 6.65% respectively. The Baring Euro Dynamic Asset Allocation Fund follows the same strategy as other Barings’ multi asset funds, taking a global perspective but ensures that at least 50% of the fund’s exposure is in Euros.
Hartwig Kos added: “On the fixed income side, we are also invested in European high yield debt, which we believe will be positively impacted by the general search for yield in the market. We have also found the risk premia in Russia and Brazil to be particularly attractive.
“Another theme in the portfolio is our allocation to European property. While we do not yet see any overall inflation in Europe, we do see asset price inflation due to a mismatch of interest rates – the ECB benchmark rate is too low for the economic conditions in Germany and other northern European countries, so property prices and credit are booming in those regions. To capture this opportunity, we have taken positions in a number of real estate investment trusts across northern Europe.”
Annual consumer price inflation across the Eurozone climbed up to zero in April 2015 after four months of consecutive declines, Eurostat has announced. However, there is still much to do. Even at zero, the rate of inflation remains well below the European Central Bank's (ECB) target of at or below 2%, with the weak performance owing largely to declining energy prices. Meanwhile, the unemployment rate stayed steady at 11.3% in March.
According to the Centre for Economics and Business Research (Cebr), this should give the ECB a chance to catch its breath after a bumpy start to the year. Its quantitative easing programme (QE), launched to address the currency union's poor economic performance, is showing results. Much has happened through the currency channel, with the euro depreciating sharply against major currencies since the policy was announced. Consumers are also starting to feel the benefits: confidence across the Eurozone is up and retail sales are growing at their fastest pace since 2005. This has caused some to think that the ECB may terminate QE earlier than the currently suggested timeframe of end 2016.
The last two years suggest that trying to gauge the economic climate a year ahead can be tricky. Cebr remains on the cautious side. “The Eurozone job is definitely not done yet, let alone well done. Germany is carrying on a decent path to recovery but the union's second-largest economy, France, is still far from finding its way there. Much-needed labour market reforms have been absent from the picture, and, with the presidential election season approaching fast, appetite for pressing on with unpopular measures is bound to decline,” Cebr said in a statement.
The independent economics consultancy continued: “Conditions seem brighter in the South, especially in Iberia. Looking ahead to the rest of the year, the Eurozone's southern periphery will most certainly enjoy an uptick in the summer as tourist season kicks in. Receipts from tourism should be especially strong this season given the weakness of the euro and geopolitical tensions in regional competitors such as North Africa. But the fundamentals remain weak.”
Greece, while closer to a deal now after a new reforms package emerged from the new negotiating team in Athens earlier this week, is still at a very fragile state. Its banking sector is heavily dependent on the ECB's willingness to continue providing funds through the Emergency Liquidity Assistance mechanism. In 2015 thus far, around €30 billion of deposits have been withdrawn from Greece's banks. And non-performing loans are at 35%, much higher than 2012 levels of 25%. The banks remain systemically sound: capital adequacy ratios at above 12% are exceptionally high. But any “accident” in the negotiation process would quickly make banks lose deposits. It will then be up to the ECB to decide the country's fate.
European Central Bank (ECB) and Bank of England (BoE) have announced measures to enhance financial stability in relation to centrally cleared markets in the EU.
The ECB and the BoE have agreed enhanced arrangements for information exchange and cooperation regarding UK Central Counterparties (CCPs) with significant euro-denominated business.
A CCP places itself between the original counterparties to a transaction, effectively guaranteeing that if one counterparty fails, the CCP will continue to perform on the transaction to the other party. A CCP protects itself by taking collateral (‘margin’) from each party and by collecting a ‘default fund’ from its members to meet losses that exceed the margin it holds.
The ECB and the BoE are also extending the scope of their standing swap line in order, should it be necessary and without pre-committing to the provision of liquidity, to facilitate the provision of multi-currency liquidity support by both central banks to CCPs established in the UK and euro area respectively. CCP liquidity risk management remains first and foremost the responsibility of the CCPs themselves.
This announcement follows the judgement on 4 March 2015 by the General Court of the EU. In light of these agreements the ECB and UK government have agreed to a cessation of all legal actions covering the three legal cases raised by the UK government.
First, the ECB is to launch an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds. The expanded programme will see monthly purchases of €60 billion set to run for 18 months or until required.
Starting March, the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key.
Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). More details will be released on this later.
Third, a decision was taken to keep the key ECB interest rates unchanged. The main interest rate remains at 0.05%, the marginal lending rate stays at 0.3% and the deposit rate at -0.2%.
“Today’s monetary policy decision on additional asset purchases was taken to counter two unfavourable developments. First, inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments. This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical lows. At the same time, economic slack in the euro area remains sizeable and money and credit developments continue to be subdued,” stated Mario Draghi, President of the ECB.
“Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results. As a consequence, the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation. Thus, today the adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound.”
According to Mr Draghi, today’s measures will decisively underpin the firm anchoring of medium to long-term inflation expectations.
“The sizeable increase in our balance sheet will further ease the monetary policy stance. In particular, financing conditions for firms and households in the euro area will continue to improve. Moreover, today’s decisions will support our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. Taken together, these factors should strengthen demand, increase capacity utilisation and support money and credit growth, and thereby contribute to a return of inflation rates towards 2%.”
The finance industry has been quick to pass comment on the QE measures.
“The size of the ECB’s programme, combined with its potentially open-ended nature, should convince markets that Mario Draghi is committed to fighting deflation,” said Ben Brettell, Senior Economist, Hargreaves Lansdown.
“In many ways the fact that Draghi has finally been forced to use his silver bullet is a measure of how bad the economic situation in Europe has become. Bundesbank officials have made it clear they don’t think economic conditions warrant QE, but few outside Germany would agree that today’s measures are anything less than necessary.”
John Cridland, CBI Director-General, said: “At the moment, flagging Eurozone economies are dragging on UK and world growth. QE will give the Eurozone recovery a much-needed boost, which should also have a positive economic effect in the UK.
“To gain maximum effect though, this action must go hand-in-hand with structural reform. France needs to work with the business community to modernise its labour rules and Germany should invest more in infrastructure.”
While QE has been largely welcomed, Europe faces another challenge later this week when Greece goes to the polls. A victory for the anti-austerity Syriza party could escalate ‘Grexit’ fears amid negotiations over new bailout terms when the current deal expires in February.
The Eurozone has slipped into deflation for the first time since October 2009 as the annual change in the Consumer Price Index fell below zero to -0.2% in December, Eurostat reported on January 7, 2015. The unemployment rate across the currency area was reported to have remained steady at 11.5%.
Beneath the headlines, the data continues to mask the mixed realities faced by the currency union's members, especially those to the south of the Frankfurt-based European Central Bank (ECB) who is responsible for maintaining price stability across the bloc, according to Danae Kyriakopoulou, Economist with the Centre for Economics and Business Research (Cebr).
Greece and Spain have already been in deflation for months now (in the case of Greece for almost two years) and have been suffering from unemployment rates more than twice as high as the Eurozone average since mid-2011. In Germany, by contrast, unemployment has been on a downward trend and is now at a modest 6.5%, while annual inflation is still positive at 0.2%.
“This picture may seem puzzling to the eyes of the German taxpayers, who as the largest creditor to the European institutions are becoming increasingly fatigued by the Greek bailout saga. With so many funds sent to Greece and managed under the direction of the combined economic expertise of the troika lenders (ECB, EU and IMF), why are economic indicators in Greece still doing so badly five years on?” asked Ms Kyriakopoulou.
Recent research by the Athens-based economic analysts Macropolis shows that out of the total €226.7 billion that has been supplied to Greece since May 2010 by the troika, only 11% was used to sustain the needs of the Greek state, such as maintaining the provision of basic public goods and services. More than half of the funds have gone back to the creditors in the form of repaying the debt and the interest associated with it, the think-tank reports.
“As recovery remains elusive not only in Greece, but in many other debt-ridden periphery economies and even the currency bloc as a whole, the key question now is what kind of fiscal and monetary policies will be designed in response? Due to their dire economic situation, most periphery countries have little fiscal room to boost their economies through spending, and Germany has pledged to deliver a balanced budget this year,” said Ms Kyriakopoulou.
“The ECB retains a potential silver bullet in the form of quantitative easing (QE) still up its sleeve and ready to be launched. The central bank has a central target for consumer price inflation of 2%. In this light, [Eurostat’s report] undoubtedly raises the pressure on the ECB to act. On the other hand (Liposuction in Dubai), it is worth keeping in mind that the decline in prices was chiefly driven by a 6.3% year-on-year fall in energy prices. This is a ‘good type’ of deflation as it directly translates into a boost for consumers' pockets.
“Given that the ECB has for so long resisted QE even while some countries were in ‘bad’ deflation, there may be little hope in expecting action now that deflation has spread to the rest of the bloc due to factors beyond its control. Overall, Cebr would welcome a move to QE but maintains its view that it would be insufficient to kick-start the recovery. A softer take on austerity and the setting of both fiscal and monetary policies in expansionary mode are imperative to avoid another crisis,” Ms Kyriakopoulou concluded.