This document summarizes a report from the Cologne Institute for Economic Research on monetary policy outlooks for the ECB and Fed in December 2015. It finds that:
1) Credit growth is weak in the Eurozone, hindering the ECB from reaching its inflation target, due to impaired bank lending channels. In contrast, money and credit growth are both increasing in the US.
2) The ECB is expected to further intensify its accommodative monetary policy by cutting rates into negative territory and expanding its asset purchase program, while the Fed will likely begin gradually raising rates.
3) Weak credit growth in the Eurozone is partly due to low investment demand but also restrictive bank lending policies as banks reduce
Is the world heading towards an unprecedented zero-interest rate economy? In a globalized world like today’s, where economies are extremely interdependent,
relative prices are one of the most important key driver for increasing exports. An
appreciation of the domestic currency could scuttle export and bring the fragile economy
back to recession. This would happen if all the other countries decide to keep interest
rates steady. Is it rational to increase rates when all the others keep them steady? The
answer is clearly no. Following Dr. Keith Weiner’s theory of interest and price2
, a zero interest rate economy
can be regarded as a singularity point in Astrophysics. Once the interest rate falls to a
certain point known as “event horizon”, the theory says, then it cannot escape and rise.
Once that point is reached it becomes evident that (sovereign and private) debts cannot
be paid off, although the truth is that it was impossible to pay off them since the very
moment they were issued.
A war on thrift? A perversion of the natural order? A mad experiment? As more central banks push their deposit rate structures into negative territory, a vigorous debate has erupted among economists, investors and policy officials about the appropriateness, effectiveness and consequences of negative interest rates.
Our October 2010 Newsletter is now available. The Newsletter Article, “Can The Fed Boost The Economy?” discusses the four things that Fed Chair Bernanke said that the Fed could do to boost the economy. The article explains how each of the 4 options he proposed would affect your company’s future. Our second article, “In Case You Didn’t Notice, The Recession Ended In June 2009?” addresses the real meaning of the recessionary slide ending before the stimulus had any impact and what it will take for the economy to have a strong recovery. Our final article, “Is The Real Employment Picture Still Deteriorating?” talks about the negative meaning of last Friday’s Labor Department unemployment report and its long term implications.
We expect rate volatility to remain high as Fed tapering continues and as the U.S. labor market struggles to normalize. In Europe, the European Central Bank has moved a step closer to easier monetary policy, which may drive further spread compression in peripheral sovereign bonds. Recent stability in emerging-market asset markets suggests better data for developing countries could be on the horizon. Our outlook for credit, prepayment, and liquidity risks remains positive.
Is the world heading towards an unprecedented zero-interest rate economy? In a globalized world like today’s, where economies are extremely interdependent,
relative prices are one of the most important key driver for increasing exports. An
appreciation of the domestic currency could scuttle export and bring the fragile economy
back to recession. This would happen if all the other countries decide to keep interest
rates steady. Is it rational to increase rates when all the others keep them steady? The
answer is clearly no. Following Dr. Keith Weiner’s theory of interest and price2
, a zero interest rate economy
can be regarded as a singularity point in Astrophysics. Once the interest rate falls to a
certain point known as “event horizon”, the theory says, then it cannot escape and rise.
Once that point is reached it becomes evident that (sovereign and private) debts cannot
be paid off, although the truth is that it was impossible to pay off them since the very
moment they were issued.
A war on thrift? A perversion of the natural order? A mad experiment? As more central banks push their deposit rate structures into negative territory, a vigorous debate has erupted among economists, investors and policy officials about the appropriateness, effectiveness and consequences of negative interest rates.
Our October 2010 Newsletter is now available. The Newsletter Article, “Can The Fed Boost The Economy?” discusses the four things that Fed Chair Bernanke said that the Fed could do to boost the economy. The article explains how each of the 4 options he proposed would affect your company’s future. Our second article, “In Case You Didn’t Notice, The Recession Ended In June 2009?” addresses the real meaning of the recessionary slide ending before the stimulus had any impact and what it will take for the economy to have a strong recovery. Our final article, “Is The Real Employment Picture Still Deteriorating?” talks about the negative meaning of last Friday’s Labor Department unemployment report and its long term implications.
We expect rate volatility to remain high as Fed tapering continues and as the U.S. labor market struggles to normalize. In Europe, the European Central Bank has moved a step closer to easier monetary policy, which may drive further spread compression in peripheral sovereign bonds. Recent stability in emerging-market asset markets suggests better data for developing countries could be on the horizon. Our outlook for credit, prepayment, and liquidity risks remains positive.
Financial instruments statistics important for central banks, and especially for the National Bank of Poland because if the statistical system imposes a responsibility on the central bank it must meet all the requirements of statistical excellence. This is a very important argument, but only a formal one for our interest in this subject. There is a second stream of motives for addressing this problem in central banks. Experience gained over the last decade shows clearly that financial instruments, especially those issued by enterprises, are becoming increasingly important for monetary transmission mechanisms and for financial stability. Among other things, there is empirical evidence that corporate bond spreads lead real economic activity. The situation in the financial instruments market is also meaningful for the general condition of the credit market, as bonds are close substitutes for banking credit. Development of the financial instruments market also contributes to the so-called financial market deepening effect, with multiple consequences for transmission mechanisms.7 It should be noted that, owing to the wide variety of channels through which financial instruments can interfere with monetary policy operations, the central banks are interested in collecting detailed information on these instruments. In practice it results in a complexity of standards for financial instruments security statistics that central banks are expected to meet.
LPL Weekly Economic Commentary 7-24-17
The structural and demographic problems that will drive the deficit over the next several decades remain in place.
Global bond markets fell in May and June, as investors contemplated the end of massive liquidity from the U.S. Federal Reserve’s bond-buying program. The fund’s overweight exposure to the strengthening U.S. dollar aided performance during the quarter, as did our holdings of commercial mortgage-backed securities. Our mortgage credit holdings and our allocation to high-yield bonds generated positive returns early in the period before investors began to shed risk in May, but the positions remained positive overall for the quarter. We have a generally positive outlook for global economic growth and are seeking to capitalize on opportunities in spread sectors exhibiting improved relative value.
Financial instruments statistics important for central banks, and especially for the National Bank of Poland because if the statistical system imposes a responsibility on the central bank it must meet all the requirements of statistical excellence. This is a very important argument, but only a formal one for our interest in this subject. There is a second stream of motives for addressing this problem in central banks. Experience gained over the last decade shows clearly that financial instruments, especially those issued by enterprises, are becoming increasingly important for monetary transmission mechanisms and for financial stability. Among other things, there is empirical evidence that corporate bond spreads lead real economic activity. The situation in the financial instruments market is also meaningful for the general condition of the credit market, as bonds are close substitutes for banking credit. Development of the financial instruments market also contributes to the so-called financial market deepening effect, with multiple consequences for transmission mechanisms.7 It should be noted that, owing to the wide variety of channels through which financial instruments can interfere with monetary policy operations, the central banks are interested in collecting detailed information on these instruments. In practice it results in a complexity of standards for financial instruments security statistics that central banks are expected to meet.
LPL Weekly Economic Commentary 7-24-17
The structural and demographic problems that will drive the deficit over the next several decades remain in place.
Global bond markets fell in May and June, as investors contemplated the end of massive liquidity from the U.S. Federal Reserve’s bond-buying program. The fund’s overweight exposure to the strengthening U.S. dollar aided performance during the quarter, as did our holdings of commercial mortgage-backed securities. Our mortgage credit holdings and our allocation to high-yield bonds generated positive returns early in the period before investors began to shed risk in May, but the positions remained positive overall for the quarter. We have a generally positive outlook for global economic growth and are seeking to capitalize on opportunities in spread sectors exhibiting improved relative value.
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The very expansive and unconventional monetary policy of the ECB reduced the tensions of the Euro debt crisis at the price of persistently very low interest rates.
While the ECB was right to act at the peak of the crisis, the risks of the low-interest rate environment become increasingly obvious. Private savings suffer from very low
yields, which is particularly detrimental for long-term retirement savings. Moreover, financial stability risks could arise, as ultra-low interest rates can cause a search for
yield among investors. Banks and life insurance companies are exposed to reduced interest profits respectively lower yields. While life insurance companies can cope with a shorter period of low interest rates, a longer period, however, poses challenges, as contracts with guaranteed interest rates have to be served.
But resolving this legacy issue with continued application of past interventionist instruments does not incentivize the much needed structural reforms and private capital market activities. Financial repression has induced a re-allocation of capital across markets and greatly enhanced the role of public markets at the detriment of private market activities. Artificially low – or in some cases even negative – interest rates break the credit intermediation channel which can crowd out viable private investors.
Etude PwC Global Economy Watch (fév. 2015)PwC France
http://bit.ly/GlobalEconomyWatchfev15-CP
Selon la dernière étude « Global Economy Watch » du cabinet d’audit et de conseil PwC, les économies importatrices nettes de pétrole, telles que la zone Euro, les États-Unis et le Japon devraient être les grandes gagnantes de la chute du prix du pétrole au cours de l’année 2015. La zone Euro devrait également bénéficier à court terme du programme d’assouplissement quantitatif annoncé par la BCE.
Forward guidance by central banks is no Panaceatutor2u
Central banks in recent months have experimented with ‘forward guidance’ – sending signals about the future path of monetary policy particularly in relation to interest rates – as a way of stabilising medium to longer run expectations in the markets and among businesses and consumers.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
The global economy remains fragile going into 2023. There are possibilities of mild recession and stagflation in some economies. Deloitte 2023 Banking & Capital Markets Outlook shares comprehensive overview insights into the Banking and Capital market segments. Uncover about Retail Banking: Envisioning new ways to serve and engage with customers, Consumer Payments- build deeper financial relationships beyond transaction flows.
La gran banca europea pone a punto sus balancesPwC España
Desde el inicio de la crisis, la gran banca europea ha reducido su tamaño –sólo entre 2012 y 2013 sus activos cayeron un 11%-, ha mejorado sus ratios de capital y ha rebajado sensiblemente su exposición al riesgo. Además, ha ampliado su número de depósitos un 14,5% y ha aumentado su liquidez un 78%. Sin embargo, todavía sigue pendiente de ajustarse a nuevas exigencias regulatorias.
QE has become an integral part of monetary policy in a number of countries over the last ten years. Essentially it has been part of a strategy of cheap money brought in by central banks as a policy response the 2007-08 Global Financial Crisis amid fears of a return to deflationary depression experienced in the 1930s. Economic historians will surely debate the role of Quantitative Easing (QE) in staving off a depression for many years to come.
World Currencies
Currently most—if not all—currencies are directly pegged to the US dollar with the
governance of a monetary standard. The variance in the effects of inflationary pressure—when
compared to the US dollar—is due to their value (purchasing power) and their central banks'
monetary policies. Today we have reports concerning the rise in value of various currencies
when compared to the US dollar. For the most part, this is due to the US dollar's rate of descent
due to its central bank's failure to raise the Fed Fund rate which would give some balance to its
devilish inflationary monetary policy.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
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Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
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I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
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The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
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Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Yes of course, you can easily start mining pi network coin today and sell to legit pi vendors in the United States.
Here the telegram contact of my personal vendor.
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#pi network #pi coins #legit #passive income
#US
2. 2
Content
Executive Summary.................................................................................................... 3
1. Low Investment Demand and Low Credit Growth ............................................... 4
2. ECB Is Likely to Intensify Policy Accommodation................................................ 6
3. Fed Is Likely to Start Gradual Exit from Low Interest Rates ................................ 9
4. Conclusion and Policy Recommendations ........................................................ 10
References ............................................................................................................... 11
JEL-Classification:
E31: Price level, inflation, deflation
E52: Monetary policy
E58: Central banks and their policies
3. 3
Executive Summary
While the ECB still struggles with an impaired bank lending channel of monetary
transmission, the Fed successfully fought the labor market slack that was caused by
the great recession of 2008. Due to the improved labor market, the Fed can now start
its gradual interest rate lift-off. The ECB will increase its stance of policy
accommodation instead, since low interest rates still do not translate into higher
inflation. On the contrary, inflation and interest rates are decreasing in tandem. The
reason for the impaired monetary transmission channel was originally the banking
and sovereign debt crisis in the Eurozone, but the impairment of monetary
transmission is now caused by banks’ reduction in risk-weighted assets, which are an
effect of the implementation of the new Basel III capital ratios. Instead of lending to
businesses and households banks increased their exposure to sovereigns. This
effect is due to the preferential treatment of sovereign debt in bank regulation and is
exacerbated by the low interest rate environment. As long as credit growth does not
contribute to the growth of money, reducing interest rates even further will not bring
inflation back to its target value. It seems more and more that banks’ capital
regulation hinders the credit channel of monetary transmission to function, on which
the ECB has to react by further increasing policy accommodation. It seems doubtful
that further policy rate cuts into the negative territory will increase bank lending as
long as bank lending is restricted by a lack of equity capital. For inflation to return to
normal, banks’ capital regulation has to be adjusted in such a way that the credit
channel of monetary transmission is working properly again. For achieving this, the
abatement of the preferential treatment of sovereign debt in bank regulation is highly
necessary. Based on our analysis, we expect the ECB to cut its main refinancing rate
into negative territory and the deposit rate further into negative territory. Moreover,
we expect the ECB to enlarge its asset purchase program for one additional year.
For the Fed we expect a gradual adjustment of the Federal Funds Rate corridor by
0.25 percentage points at each of the subsequent open market committee meetings.
Table 1: IW Monetary Outlook December 2015
Interest rates, in percent
October
2014
October
2015
Forecast for
Dec. 2015
Forecast for
Jan. 2015
ECB Main
Refinancing Rate
0.05 0.05 -0.05 -0.05
Federal Funds Rate
Target
0.00 – 0.25 0.00 – 0.25 0.25 – 0.50 0.50 – 0.75
Sources: European Central Bank, Federal Reserve Bank of St. Louis, Cologne Institute for Economic
Research
4. 4
1. Low Investment Demand and Low Credit Growth
On December 3, 2015 the Governing Council of the European Central Bank (ECB)
will meet for the last time this year, while the Federal Reserve Bank’s (Fed’s) Federal
Open Market Committee (FOMC) last meeting is on December 15 and December 16.
Based on recent central bank communication, the Fed is expected to start its gradual
exit from low interest rates, while the ECB is will likely intensify its accommodative
monetary policy stance. The difference in the policy moves of both central banks is
related to the different credit dynamics in the US and the Eurozone. While money
and credit are both growing in the US, credit and money are diverging in the
Eurozone indicating a still disturbed bank lending channel of monetary transmission.
This impaired transmission channel hinders the ECB to reach its policy objective of a
medium term inflation rate of below but near 2 percent.
Figure 1: Money and Credit in the Eurozone
Index: 2005-1 = 100
Source: European Central Bank, Cologne Institute for Economic Research
5. 5
The dynamics of the monetary aggregate M3 in the Eurozone is predominantly driven
by banks’ exposures to sovereign debt, while money seems to be decoupled from the
dynamics of credit (figure 1). While the monetary aggregate M3 and loans to non-
financial companies have moved in tandem in the past, both time series seem to
diverge now. Part of the stagnating credit growth is related to stagnating investment
dynamics. But from the declining investment series cannot necessarily be concluded
that the weak credit dynamics are only caused by the weak investment dynamics,
since both time series are the result of the intersection of the demand for loans and
the supply of loans. While part of the weak investment dynamics is due to
companies’ investment inattention, the other part is due to banks’ restrictive loan
supply. In addition to that, also credit is determined by the intersection of loan
demand and loan supply. While loan demand can be weak due to companies’
investment inattention, loan supply can be weak because of banks’ restrictive credit
policies.
Figure 2: Money and Credit in the US
Index: 2005-1 = 100
Source: European Central Bank, Cologne Institute for Economic Research
6. 6
A juxtaposition of figure 1 with figure 2 indicates, that the problem of weak credit
growth is more special to the Eurozone and does not apply to the US. While the ECB
is still confronted with an impaired bank lending channel, the Fed was merely
confronted with a labor market slack which was caused by the great recession of
2008 and which could be well tackled with quantitative easing. In contrast to this, the
ECB’s quantitative easing might not be successful in achieving inflation and growth
as long as the bank lending channel in impaired. Since purchasing sovereign debt
from banks does not free equity capital which can be used for lending to non-financial
corporations, bank regulation might hinder monetary transmission.
That banks deleveraging and de-risking are a dominant driver of banks’ loan
dynamics can be inferred from the results of the IW-Bank Monitor (Demary, 2015).
Regression analyses from a panel of the 80 largest Eurozone banks show that banks
have reduced their loan supply in order to meet the higher Basel III capital
requirements. Banks normally have three options to increase capital ratios: they can
issue equity capital in financial markets, they can retain earnings or they can reduce
risk-weighted assets. Since issuing equity capital can be prohibitively expensive in
times of market stress, while retaining profits might be not possible for most banks,
since most of these banks did not returned to being profitable, banks dominant way
to increase their capital ratios was to reduce lending to non-financial corporations.
Profitable and well capitalized banks maintained lending, but this was only the case
for eight of 80 banks in the sample. In addition to reducing risk-weighted assets,
banks switched from financing non-financial corporations to financing sovereigns.
This result is due to the preferential treatment of sovereign debt in bank capital
regulation, which allows banks to purchase sovereign debt without issuing equity
capital. Moreover, the negative effects of the preferential treatment of sovereign debt
on bank lending are accelerated through the low interest rate environment as the
results show. These results indicate that bank regulation might have a negative effect
on the bank lending channel of monetary transmission and might be one reason why
the ECB still has difficulties in achieving its objective of maintaining inflation near its
inflation target of below but close to 2 percent in the medium term.
2. ECB Is Likely to Intensify Policy Accommodation
In comparison to the last IW Monetary Outlook (Hüther/Demary, 2015), Eurozone
inflation improved only slightly from -0.1 percent in September 2015 to 0.1 percent in
October 2015. Although the low headline inflation is due to declining energy prices,
core inflation, i.e. inflation without the dynamics of energy and unprocessed food
prices, is still at a too low level. It improved slightly in October to 1.0 percent from 0.9
percent in September. Compared to its October 2014 level, it is now 0.3 percentage
points higher. An additional threat to price stability are the still unanchored inflation
7. 7
expectations. The survey of professional forecasters reveals that the surveyed
experts expect consumer prices in 2016 to increase on average only with a rate of
1.0 percent. In order to bring inflation expectations back to the ECB’s inflation target,
either energy prices have to increase in beginning of 2016 or the ECB has to conduct
a more accommodative monetary policy. While inflation expectations did not improve
sufficiently, the growth rate of M3 improved in October. The money growth stock
grew at a rate of 5.3 percent compared to the previous year. In September it
increased by 4.8 percent compared to its previous year level. Deflationary pressures,
however, come from the still negative Eurozone output gap. However, some
improvements can be seen. The growth rate of real GDP increased from 0.8 percent
in the third quarter of last year to 1.6 percent in the third quarter of this year.
Moreover, the labour market improved slightly in October 2015 with the Eurozone
unemployment rate declining to 10.8 percent from 11.5 percent in October 2014.
Although the Eurozone indicators show some signs of improvement, the monetary
outlook does not indicate any room for the ECB to halt policy accommodation. On the
contrary, the slow improvement of key indicators might be a reason for the ECB to
remain highly accommodative.
Table 2: Key Eurozone Indicators
In percent, percentage change from previous year
Previous Year Latest Data
Consumer Price Inflation Rate 0.4 0.1
Core Inflation Rate 0.7 1.0
Inflation Expectations for Next Year 1.0 1.0
Output-Gap -3.3 -2.7
GDP Volume Growth Rate 0.8 1.6
Monetary Aggregate M3 Growth 2.5 5.3
Unemployment Rate 11.5 10.8
Sources: ECB, Eurostat, OECD, Cologne Institute for Economic Research
Figure 3 strengthens our view that the ECB will stay highly accommodative for a
while. In December 2011 the ECB announced its first round of balance sheet
expansion with the two long-term refinancing operation tenders. Since this time the
interest rates in the Eurozone are trending downwards on average. The median
interest rate on sovereign bonds with a maturity of 10 years decreased from around 5
percent to approximately 1 percent. However, these lower interest rates did not
prevent inflation from trending downward in tandem with interest rates.
From the downward co-movement of interest rates and inflation one should not
deduce causation from interest rates to inflation, since inflation was hit by a negative
aggregate demand shock during the Eurozone recession and most recently by a
8. 8
positive aggregate supply shock trough declining energy prices. The problem why the
ECB’s balance sheet expansion and its recent quantitative easing program did not
lead to rising inflation rates up to now is caused by a low investment demand and at
the same time by banks restrictive loan supply which was first due to their
deleveraging and now to their adaption to the new Basel III capital requirements.
Hence, weak credit is not caused by a shortage of central bank liquidity, but by a
shortage of equity capital. The results suggest that the new bank capital
requirements might hinder monetary transmission and thereby force the ECB to be
highly accommodative.
Figure 3: Eurozone Inflation and Median Yield on 10 Year Eurozone Member
Country Sovereign Bonds
In percent
Sources: European Central Bank, Eurostat, Cologne Institute for Economic Research
Based on the monetary developments, the weak investment demand and banks
reduction in their risk-weighted assets, we expect inflation to stay below the ECB’s
inflation target in the following months and therefore we expect the ECB to stay
highly accommodative. It seems possible that the ECB tries to bring inflation
expectations back to their target level by expanding its large-scale asset purchase
9. 9
program for one additional year. Moreover, the ECB might try to increase the banks’
loan supply by reducing the risk-free interest rate even more, such that banks will
invest in projects with a very low net present value. Since the risk-free interest rate is
already close to zero, we expect the ECB to cut its main refinancing rate and the
deposit rate by 0.1 percentage point, such that the main refinancing rate will be -0.05
percent and the deposit rate be at -0.3 percent.
3. Fed Is Likely to Start Gradual Exit from Low Interest Rates
The monetary outlook for the US looks more favourable compared to the Eurozone’s
outlook. Under these conditions, the Fed can stay accommodative for a while even
under an increasing path for the Federal Funds Rate corridor. Although consumer
price inflation was only at 0.2 percent in October 2015 compared to 1.4 percent in
October 2014 and core inflation is only 1.3 percent, the US labour market improved
in such a way that inflationary pressures might arise in the distant future. The
unemployment rate improved to 5.0 percent in October 2015 compared to 5.7
percent in October 2014. With reaching full employment, robust growth of real GDP
and anchored inflation expectations at 2.0 percent for 2015, the Fed can start its
gradual exit from low interest rates without risking economic growth.
Table 3: Key US Indicators
In percent
Previous Year Latest Data
Consumer Price Inflation 1.4 0.2
Core Inflation Rate 1.5 1.3
Inflation Expectations for Next Year 1.9 2.0
Output-Gap -2.8 -2.0
GDP Volume Growth Rate 2.9 2.2
Monetary Aggregate M2 Growth 5.5 5.7
Unemployment Rate 5.7 5.0
Sources: Federal Reserve Bank of St. Louis, Federal Reserve Bank of Philadelphia, Bureau of Labor
Statistics, OECD, Cologne Institute for Economic Research
Figure 4 confirms our assessment that the US is on a stable growth path, so that the
Fed can safely start a gradual return to higher interest rates. The labour market
conditions index and the recession probabilities indicate no dangers for the growth of
the US economy. Therefore, we expect the Fed to increase the corridor for the
Federal Funds Rate to 0.25 – 0.50 percent at its December 2015 meeting and to 0.50
– 0.75 percent at its January meeting.
10. 10
Figure 4: US Recession Probabilities and Change in Labour Market Conditions
Index points
Source: Federal Reserve Bank of St. Louis
4. Conclusion and Policy Recommendations
While the Fed has successfully fought the labour market slack which was caused by
the great recession of 2008, the ECB is still struggling with an impaired monetary
transmission channel. As a consequence of the improved labour market the Fed can
now start its policy lift-off, while the ECB is still combatting deflationary pressures
which are the result of a weak investment demand and an impaired bank lending
channel of monetary transmission. These developments force the ECB to expand its
large-scale asset purchase program and the ECB might drive interest rates further
into negative territory or order to stimulate bank lending.
It seems that the credit channel of monetary transmission is still not working such
that the ECB’s expansionary policy measures translate into higher inflation rates.
One reason for this might be the low investment demand, the other is that the
implementation of the higher Basel III capital ratios hinders the credit channel to
11. 11
function. Behind this background, further research should elaborate on this, because
either higher capital ratios do not fit to an inflation target of near, but below 2 percent
or the Basel III capital ratios are too high for the credit channel of monetary policy to
function properly. An adjustment of either banks’ capital requirements of the ECB’s
policy objective would be necessary when the inflation target of close to 2 percent is
only reachable with extremely accommodative monetary policy measures. Although it
can be possible that this effect is only due to the implementation phase of Basel III
and it will phase out when implemented, one nevertheless has to ask if bank
regulation and monetary policy collide. Since the accommodative monetary policy,
including large-scale asset purchases as well as negative interest rates, show
already tremendous side effects to financial stability, for savings and for old age
provisions, policy makers might have to reconsider bank regulation.
Behind the background that a lack of equity capital is the limiting factor to bank
lending and not a lack of central bank liquidity, the ECB’s decision to impose
negative interest rates on banks’ deposits at the ECB seems to be counterproductive.
In times, in which banks have to increase their capital buffers it might be better to
foster banks to return to profitability instead of introducing measures which increase
their interest rate costs.
References
Demary, Markus, 2015, IW–Bankenmonitor: Schleppende Kreditentwicklung trotz
oder wegen der Rekapitalisierungsfortschritte, IW-Trends Nr. 3, 1. Juli 2015
Hüther, Michael / Demary, Markus, 2015, IW Monetary Outlook October 2015 – Low
Inflation: A Challenge for Central Banks, IW Policy Paper 33-2015,
http://www.iwkoeln.de/_storage/asset/248656/storage/master/file/7957897/download/
Monetary%20Outlook%20policy%20paper%20IW%20Institute.pdf