ECB warns buoyant markets ‘out of sync' with uncertain world
FRANKFURT: Buoyant credit and stock markets appear 'out of sync' with a world gripped by geopolitical and trade uncertainty, the European Central Bank said on Wednesday.
The warning came as part of the ECB's twice-yearly Financial Stability Review, a litany of old and new risks ranging from funds depleting their cash buffers to overvalued property markets and high government debt.
In the latest edition, the ECB said investors might be underestimating the risk that the economy performs worse than expected, trade tensions escalate or an expected easing of monetary policy fails to materialise.
'Despite the drawdowns, equity valuations remain high while credit spreads still appear out of sync with underlying credit risk,' ECB vice-president Luis de Guindos said in his foreword.
The ECB described tariffs as 'major downside risk', estimating that an increase of one standard deviation in an index measuring trade policy uncertainty lowered the median growth forecast by 0.15 percentage points after four quarters.
ECB to stand by past stimulus policies in strategy review
Such a surge in uncertainty also pushed down banks' share prices by 10.4% after six months and increased their cost of borrowing on the bond market by 7 basis points, the ECB said.
Among other risks, the ECB listed cyber attacks, concentrated investments in private markets and growing - if still tenuous - linkages between cryptocurrencies and traditional finance.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
7 hours ago
- Business Recorder
ECB can take time on policy, policymaker Nagel says
FRANKFURT: The European Central Bank can take its time on interest rates with monetary policy now set at a neutral level that is no longer restrictive, ECB policymaker Joachim Nagel said on German radio on Sunday. The ECB cut interest rates on Thursday for the eighth time in a year but signalled at least a policy pause next month after inflation returned to its 2% target. Nagel, who is also the president of Germany's central bank, said rates are now at a neutral level - central-banker language to describe policy that neither expands nor brakes the economy. ECB should not 'overreact' if inflation edges below 2%, Vujcic says 'We are no longer restrictive. I believe that we can now take the time to look at the situation first. We now have maximum flexibility at this interest rate level,' Nagel said in a live interview on Deutschlandfunk radio. The ECB has lowered borrowing costs eight times, or by 2 percentage points since last June, seeking to prop up a euro zone economy that was struggling even before erratic U.S. economic and trade policies dealt it further blows.
Business Recorder
13 hours ago
- Business Recorder
ECB should not ‘overreact' if inflation edges below 2%, Vujcic says
DUBROVNIK: The European Central Bank should not 'overreact' to euro-zone inflation edging below its 2% target as there are good reasons to believe it will come back up, ECB policymaker Boris Vujcic told Reuters. The ECB cut interest rates on Thursday for the eighth time in a year but signalled at least a policy pause next month, despite projecting inflation at just 1.6% next year. Inflation in the 20 countries that share the euro was 1.9% in May, according to a flash reading published last week. Vujcic, who is also Croatia's central bank governor, said price growth was likely to bounce back later and that monetary policy should not try to do 'precision surgery' on small fluctuations from its goal. 'A few tens of basis points' deviation on either side of the target is not a problem,' Vujcic said in an interview on Saturday in Dubrovnik. 'Because you will always have small deviations. If you consider them as a problem, then you will overreact. This is not precision surgery.' Vujcic said it was reasonable to expect inflation to edge back up as energy prices find a bottom and the economy accelerates. Euro strength is also unlikely to have second-round effects on prices unless it lasts several quarters, Vujcic said. Some ECB policymakers, especially Portugal's central bank governor Mario Centeno, worry that euro-zone inflation may slow too much. Vujcic said he sees the risks surrounding the inflation outlook as 'pretty balanced' but cautioned there was 'complete uncertainty' surrounding global trade tensions with U.S. President Donald Trump's administration. ECB strategy review Vujcic recalled advice he received as a young deputy governor from then-Federal Reserve Chair Alan Greenspan: a high rate of inflation was more dangerous than a low one. Greenspan cited two decades of relatively benign deflation in the late 19th century, which was partly due to improvements in productivity, Vujcic said. 'Nobody cared about low inflation because of the productivity growth,' he said. 'You have a monetary policy problem to bring it up. Yes, but why would you insist so much if you don't have a problem in the economy?' The ECB is reviewing its long-term strategy, including the role of massive bond purchases, or quantitative easing, in reviving inflation when it is too low. The ECB injected some 7 trillion euros ($8 trillion) of liquidity into the banking system through QE and other tools over the past decade. These schemes were blamed for inflating bubbles in real estate and setting up the central bank for sizeable losses. ECB's Villeroy: normalisation of interest rates in euro zone probably not complete 'The next time around, people will take the lessons from the previous episode, and I think that the bar for QE would be higher,' Vujcic said. He said QE could help stabilise dysfunctional markets - such as during the 2008 financial crisis and the COVID-19 pandemic - but if used 'for years and years to try and bring inflation up, its marginal efficiency declines'. Such calls for self-criticism are shared by some policymakers in the ECB's hawkish camp. But sources told Reuters they were unlikely to feature in the ECB's new strategy document, to be published this summer.
Business Recorder
2 days ago
- Business Recorder
Euro zone bond yields ease ahead of key US jobs data
Euro zone bond yields eased ahead of key U.S. jobs data on Friday, a day after they spiked following a signal from the European Central Bank that it may be nearing the end of its rate-cutting cycle. The ECB cut its deposit rate by 25 basis points to 2% on Thursday as expected, but it dampened prospects of further rate cuts with ECB President Christine Lagarde saying the bank was in a 'good place', hinting at a potential pause to the easing cycle. Germany's two-year yield, which is sensitive to changes in monetary policy expectations, was down 3 bps at 1.845%. Yields on the two-year Schatz rose 8.5 bps on Thursday, marking their largest one-day increase in a month. There was probably some element of pullback in terms of market players maybe thinking Thursday's move went marginally too far, noted Lyn Graham-Taylor, senior rates strategist at Rabobank. He also pointed to rather weaker-than-expected French and German industrial production prints earlier in the session. Germany's 10-year yield, the benchmark for the euro zone, was last down 5 bps at 2.539%. Euro zone bond yields muted ahead of ECB policy rate decision The spread between the two- and 10-year yields was at 68.80 bps, hovering close to its narrowest since April 4 at 68.20 bps, which it hit the previous day. Money market traders have now priced in 24 basis points of easing by year-end and implied about a 18% chance of a rate cut in July, from about 30% before Lagarde's press conference. The central bank also lowered its inflation and growth projections as the U.S. president's trade war continues to impact the global economy. 'The ECB's scenarios regarding the trade conflict make it clear to us that future interest rate policy is likely to depend heavily on Donald Trump's decisions,' analysts at Frankfurt-based Metzler wrote in a note to clients. If the European economy weakens further then the central bank might cut interest rates again, policymaker Yannis Stournaras told Bloomberg TV in an interview on Friday, adding that 'this is not expected.' US payrolls Later in the day, markets will watch U.S. key payroll numbers closely as a run of soft economic data this week has stoked concerns of a downside surprise in the monthly print, which would feed fears of stagflation while piling pressure on the Federal Reserve to ease policy in a hurry. 'There are some hints of a slowdown in the labour market. So it will be interesting to see if this is backed up with the headline payrolls number today,' Rabobank's Graham-Taylor said. In Europe, stronger-than-expected revised numbers for economic growth for the euro zone in the first quarter and retail sales data drew hardly any reaction from the bond markets. Italy's 10-year yield, the benchmark for the euro area periphery, was down 7 bps at 3.48%.
