Tuesday, 10 October 2017

Preparing for an ECB interest rate hike?

Posted by Valentine at 11:10 Labels:

Well… if you haven’t started yet, then you should right now. Why? Because there is an increasing number of signals pointing at a near-term adjustment.

On Monday, the European Central Bank said financial institutions within the Eurozone are ready to face interest rate hikes and shocks.

This conclusion was outlined after the regulator tested one hundred eleven banks against different scenarios, including a new financial crisis. Yeap, the so-called “stress tests”.

I know what you are thinking… or better to say who you are thinking about. Mario Draghi, the conservative ECB governor who continues to insist about the need to keep running monetary stimulus in the Eurozone, even when economic indicators show it is time for a change.

In the latest ECB monetary policy meeting, Draghi (against the odds) said quantitative easing was still necessary to keep the economy going, but recognized that it might be time for cutting monthly bond purchases. The Executive Committee of the ECB will revise the plan this month.

In this line, it is likely the ECB will first start adjusting its monetary policy configuration with volume changes to its current bond purchases program. Then, after markets will stabilize, an interest rate hike will be the next step.

The stress test, which began in February, also concluded that a higher rate environment would increase net interest income in the following three years for the large majority of banks. On the contrary, keeping rates low would sent net interest income to the downside.

Talking about numbers… in case of an increase in interest rates by 2 percent, banks’ net interest income will move to 4.1 percent in 2017 and by 10.5 percent by 2019.

Only a few days ago, the Germany’s leading economic institutes warned that if the ECB would not implement changes soon to its current configuration, severe consequences are ahead for the regional economy in the long-term.

“In this environment, the ECB should prepare for the exit from its very expansive monetary policy and in particular from its unconventional measures,” the institutes explained.

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