The financial markets adjust to a slow tightening of ECB policy. Participants in the money and bond markets expect in the coming year with an increase in the prime rate.
When the recent communication leading policymakers from the eurozone should aim to set the financial markets on a slow tightening of ECB policy without causing serious tensions on the markets, the strategy is working. For now, participants start in the money and bond markets in the coming year increases of a key rate of the European Central Bank (ECB) into account. Evident is the interest rates that the futures market for future short-term loans between banks ( “Eonia”) are paid. For them, there is a growing expectation in the market to two increases in the interest rate of the ECB for credit from commercial banks respectively 0.10 percentage points in the coming year reveals. Currently, this deposit rate was minus 0.40 percent.
In recent weeks, the view had solidified in the financial markets that the ECB will announce in the fall for the coming year to reduce their monthly bond purchases from the current 60 billion euros. New food this view was by statements made by the governor of the Banque de France, François Villeroy de Galhau. He said the ECB would advise in the fall of a change in its monetary policy. Klaas Knot, president of the Nederlandsche Bank, remarked that the ECB was in danger, hold too long in an expansionary monetary policy.
Low-interest rates: Bank of Central Banks urges monetary policy reversal
Benoît Cœuré, Member of the Executive Board of the ECB in Frankfurt had late last week recalled that the ECB had reduced in the first months of this year the volume of monthly bond purchases by 20 billion euros, without thereby creating turbulence in the financial markets. This has some market participants, including the German bank, led to the assumption that the ECB would announce with effect from January 2018, reduce their monthly asset purchases from 60 to 40 billion euros. A reduction in purchases of securities is considered from the perspective of many participants in the financial markets as inevitable, because the ECB would push for bonds of some countries, including Germany, in the coming year to the self-imposed limits on purchases. A recent survey by the ECB when market participants have also led to the realization that liquidity decreases in the bond markets of the eurozone.
One result of the speculation on a reduction of bond purchases in recent weeks not only been a general rise in bond yields in Europe, but also an increase in the yield spreads between German and Italian government bonds. From the perspective of this increase, Commerzbank in spreads initiates the next chapter of the revaluation of European bonds. The bank, therefore, expects further increases in yields for government bonds.