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.
The European Union's statistics office, Eurostat, reported that consumer prices in the 19 countries using the euro rose 0.1% month-on-month in July for an 8.9% year-on-year increase. This is the highest rise since the euro was created in 1999.
Eurostat said that of the total, 4.02 percentage points came from more expensive energy, which is up due to the Russia-Ukraine war. 2.08 percentage points stem from higher food, alcohol and tobacco costs.
Last month, the European Central Bank launched a tightening cycle following years of ultra-loose monetary policy. However, the cost of services still increased by 3.7% year-on-year in July, contributing 1.6 percentage points to the final outcome.
It was recently reported that UK inflation has now exceeded 10%, prompting thousands to sign a petition urging the government to introduce an emergency budget.
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An anticipated rise in UK and European corporate insolvencies over the next two years should be prompting both borrowers and lenders to take early advice where they have concerns about businesses' solvency outlook, says Ogier offshore restructuring specialist Simon Felton.
Simon, a partner in Ogier's Banking & Finance team, was involved in several post-financial crisis restructurings, including the receivables trustee of a £13.5bn portfolio of UK RMBS as well as portfolios of loans in the Irish banking industry and regulatory capital in the Austrian banking sector.
Recent reports have forecast that British insolvencies are set to rise by 8% in 2018 – the second highest rise worldwide, after China – and that the increasing likelihood of rate rises and the end of quantitative easing by the European Central Bank in 2019 threaten a similar increase in Europe.
Already this year, UK firms including Carillion, Toys R Us and Maplin have been declared insolvent.
Simon said that the tightening interest rate and liquidity climate should be prompting both borrowers and lenders to take advice and consider what action may be necessary now, rather than delay when options may be reduced.
He said: "Whether you're a borrower or a lender, you should be analysing each company's solvency position, particularly where those entities are reliant on group support to meet their obligations, and if you think that there are issues, taking advice early as to what your obligations or rights are, and what course of action you should take.
"Early analysis, advice and action is crucial. For directors of debtors, the nature of their obligations changes as the solvency position of the company deteriorates, as does the ability of lenders to protect themselves.
"The regulatory picture may have changed significantly over the last ten years, particularly for financial institutions, but the combination of quantitative easing by the ECB and low interest rates coming to an end may pose a test for some businesses."
(Source: Ogier)
The European Central Bank has announced its June policies, which include leaving interest rates unchanged and hinting at further action if inflation fails to improve. President Mario Draghi said at a press conference that external shocks, such as a possible exit from the EU for Britain, would affect the market negatively and he recommends that the UK remain in the EU.
Mr. Draghi hinted that there is still the possibility for future stimulus if needed. This is following the ECB’s increase in its qualitative easing programme in March from €60 billion to €80 billion. The ECB will also start buying high-grade corporate bonds in early June.
The euro barely reacted to the news that interest rates will not be changed. Most recent forecasts now expect inflation to hit 0.1% this year, 1.3% in 2017 and 1.6% in 2018, possibly due to a rise in oil prices.
David Cheetham of XTB.com comments: “As was widely expected the ECB have announced that they will make no alterations to the three benchmarks interest rates or QE programme following the conclusion of their latest meeting. During the press conference shortly after the rate decision President Draghi struck dovish chords as the markets have grown accustomed to in recent times, stating the rates will stay at present or lower levels for some time. Market reaction so far has been fairly subdued with the slight upward revision to this year's inflation forecast of 10 basis points arguably the biggest takeaway, but seemingly not a big enough development to cause a sustained market move.”
David Cheetham is a market analyst at XTB. For more information about him, please visit: https://www.xtb.com/en/market-analysis/our-analysts/david-cheetham
Hartwig Kos
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.”
European Central Bank (ECB) headquarters
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.
