On 20 October banking regulators finalised the transposition into American law of the Basel Net Stable Funding Ratio (NSFR)* liquidity requirement. This requires banks to maintain a stable funding profile with regard to the theoretical liquidity of their exposure over a one-year period (in order to protect their capacity to maintain exposure in the event of a liquidity crisis). The final rule differs from the Basel standard, by allocating a nil stable funding requirement to high-quality liquid assets (such as Treasuries) and short-term loans guaranteed by such assets (reverse repos)**
The Covid-19 health crisis is an historic shock for the eurozone economy. The economic policy response has been substantial and rapid, and this is particularly true for the monetary policy adopted by the European Central Bank (ECB). The ECB has notably introduced an emergency asset purchasing programme, the Pandemic Emergency Purchase Programme, or PEPP. In June, its envelope has been increased to the current level of EUR 1,350 billion. Thus, since March 2020, monetary policy has had a significant effect on long-term interest rates, improving financing conditions for eurozone member states and also for the private sector
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 15 June. It will be updated regularly.
M3 monetary aggregate growth continued to accelerate in the Eurozone in April, to 8.4% year-on-year from 7.5% in March, the strongest annual growth rate since early 2009. Yet the monthly growth rate of the money supply aggregate eased in April to a seasonally-adjusted 1.2% m/m, well below March’s peak of 2.5% m/m, but still three times higher than the long-term trend of 0.4% m/m. Although credit to the private sector remains by far the largest counterpart of M3 money supply, credit to general government made the biggest contribution to the acceleration of money supply growth since early 2020, bolstered by the intensification of the Eurosystem’s government securities purchasing programme (a cumulative total of EUR 67 billion in March and April 2020)
The last Bank of England (BoE) Monetary Policy Committee of May 7, 2020 leaves UK monetary policy unchanged, including the target outstanding of its asset purchase program, despite the vote of two of the members of the Committee in favor of an increase of GBP 100 bn. Inaugurated in 2009 with an initial outstanding of GBP 200 bn, the program has been extended several times. The latest increase, decided on March 19, brought the target outstanding to GBP 645 billion (including 20 bn in investment-grade corporate bonds), against GBP 445 billion (including GBP 10 bn in investment-grade corporate bonds) previously
Following the judgment of the German Constitutional Court on 5 May, the ECB Governing Council needs to demonstrate that the monetary policy objectives of its PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. In most cases, monetary, economic and fiscal policies are mutually reinforcing. When assessing whether monetary policy is appropriate, one should take into account the stance of economic and fiscal policy. The necessity to have adequate transmission to all jurisdictions as well as the likelihood and extent of tail risks due to insufficient policy action also play a role in the assessment.
Pressure on dollar liquidity created an urgent need for action from the US Federal Reserve (the Fed). Assuming its role as the global lender of last resort - the consequence of its position as the issuer of the international trade and reserve currency - the Fed reactivated the permanent or temporary swap agreements that it established with 14 other central banks in 2008. In order to extend the reach of its dollar supply, the Fed has also created a repo facility for the central banks of countries that do not have dollar swap agreements. The high fees charged, however, will limit take-up, depriving the markets of what could be a significant calming influence.
Major central banks have stepped up their efforts to attenuate the economic impact of the pandemic, raising the question whether there is a limit to balance sheet expansion. An asset purchase program (QE) can continue for a long time, given the possibility to broaden the investable universe. Quite likely, asset price distortions and concern about the riskiness of the central bank balance sheet will act as the true constraint. For this reason, a central bank could decide to finance the budget deficit directly, considering that this should have a bigger growth impact for a given expansion of the balance sheet. The real challenge under such a strategy is to keep inflation under control once the output gap is closing.
Since March 2020, the deterioration in the global economic environment has stopped the appreciation of the Egyptian pound. In 2019, the pound appreciated by 12% against the USD with the rise in current account receipts and sustained portfolio inflows. Since March, massive portfolio outflows have entailed the pound’s moderate 1.2% depreciation and a decline in the official foreign reserves of the Central Bank (CBE) by 11%. In the short term, current account revenues should weather the drop in Suez Canal and tourism revenues (20% of current account receipts in total). The CBE’s fx liquidity (8 months of imports of goods and services including tier-2 reserves) and the IMF financial support should allow the CBE to ease pressure on the pound in order to limit imported inflation
The measures taken by the US Federal Reserve (Fed) since 15 March have already had a major impact on the balance sheets of commercial banks resident in the United States*. Their reserves held at the Central Bank have considerably increased following their role as intermediaries for the Fed’s securities purchases, emergency loans and liquidity swaps. As in 2008-2014, the Fed’s quantitative easing policy has also created a disconnect between growth in loans and growth in deposits on banks’ balance sheets. Since most of the Fed’s securities purchases have been from non-bank agents, customer deposits have grown more quickly than loans
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 20 April. It will be updated regularly.
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 10 April. It will be updated regularly.
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 3 April. It will be updated regularly.
Following the example of the ECB for the significant institutions[1], the Bank of Italy has decided to recommend to banks under its direct supervision (the less significant institutions) not to distribute or commit distributing dividends at least until 1 October 2020[2]. Moreover, share buy-backs will have to be restricted and less significant institutions in Italy will have to adopt "prudent and farsighted" variable-remuneration policies. The five largest Italian banking groups, which account for almost half of the total assets of the domestic banking system, are thus likely to mobilize (in addition to the benefits that were not intended to be distributed) EUR 4.8 billion of additional common equity Tier 1 in 2019[3], representing 4.1% of its current outstanding amount (EUR 116
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 27 March. It will be updated regularly.
The ECB announced a new series of measures to counter the economic consequences of the Coronavirus pandemic. The Governing Council is seeking to maximize the impact of its actions by opting for targeted measures. It is paying special attention to the risk that monetary and financial conditions could tighten. Despite communication missteps, the ECB has expressed its determination and has called on governments to take concerted action.
The coronavirus epidemic represents a combination of a demand, a supply and an uncertainty shock. This has knock-on effects on the price of oil and on financial conditions which in turn should end up acting as an additional drag on growth. The huge drop in the price of oil following the absence of an agreement amongst the OPEC+ countries on further production cuts, makes this worse. It hits the producer countries, increases the financial pressure on energy companies, in particular those which are highly indebted, whereas the reaction on the demand side will be muted due to the epidemic and lack of visibility. The timid improvement of business survey data at the end of 2019 has been stopped. Recent data show a very significant deterioration in China, Hong Kong
In the end, the US Federal Reserve (Fed) did not wait for the next corporation tax payment deadline in April before intervening in the money market. In an attempt to stave off the risk of pressures on the market as a result of the coronavirus outbreak, it increased the scale of its repo transactions on Monday 9 March. At the end of last week, demand for cash from primary dealers far outstripped what the Fed was offering. Although the Fed has injected nearly USD 480 billion in additional central bank money since mid-September, the liquidity position (immediately available cash) at major US banks has not improved. On the one hand, bank reserves with the Fed have increased by only USD 280 billion, due to the growth in the Treasury’s general account
The Federal Reserve created a surprise this week by, quite unusually, going for an inter-meeting cut of the federal funds rate of 50 basis points. At first glance, the very nature of an epidemic makes monetary policy ill-equipped to address the consequences. The drop in demand and the disruption of supply are not related to the level of interest rates. Nevertheless, monetary policy has an important role to play in the current environment by seeking to avoid a deterioration of the financial and monetary conditions. This is a defensive move, the alternative being to run the risk that the tightening of these conditions acts as an additional brake on activity. It seems this has played a role in the decision of the FOMC and it now puts the onus on the ECB to act at its meeting next week.
A large number of economic sectors have been struggling with the impact of the Covid-19 epidemic on Chinese consumer demand, transport, tourist flows and industrial production chains. Over the past month, the People’s Bank of China (PBOC) has loosened monetary and credit conditions in order to support local corporates, help them cover their cash requirements et encourage a rapid recovery in activity. PBOC has injected a large amount of liquidity into the financial system, reduced interest rates – monetary rates, medium-term lending facility rate and benchmark lending rate – and announced special loans to firms directly affected by the virus outbreak. As a result, the weighted average lending rate, which has declined since Q2 2018 (from 5.94% to 5
Tiering partially exempts excess reserves of the euro area banks from the negative deposit facility rate (-0.5%). It applies within the limit of an amount equal to six times their minimum reserves. Banks whose excess reserves do not exceed this multiple may, in addition, convert all or part of their deposit facility into excess reserves. The amount of the deposit facility of the 19 banking systems in the euro zone decreased by 59% between September and December 2019, falling back to its spring 2016 level. We estimate that tiering reduces the cost of negative interests by EUR 4.0 bn in the euro area and EUR 825 m in France[1]. The annual cost of negative interest amounts to EUR 4.7 bn for the euro area banks, including EUR 3.5 bn attributable only to excess reserves and EUR 1
In a period of declining interest rates, the interest margin on transactions with customers has widened due to greater inertia on the downside of yields on bank assets compared to that of the cost of resources. Portuguese banks, however, hold a large share of variable rate loans which tends to accelerate the downward adjustment of the yield on the loan portfolio. In a context of durably low interest rates and close to zero cost of resources from customers, the sustainability of the interest margin will depend essentially on the ability of Portuguese banks to maintain the current rates applied on new loans[1]. A further decrease in interest rates on new loans would drive the margin on new transactions well below the margin on outstanding amounts
The ECB remains cautious in its assessment of the economic situation characterised by risks still tilted to the downside, although less than before thanks to the US-China trade deal. The message is slightly better on underlying inflation where some signs of a moderate increase are noted. Between now and year-end, the strategy review, which has now been launched, will grab a lot of attention, with markets wondering how it could influence monetary policy. The review is also important from the perspective of climate change: will monetary policy operations take it on board as a risk factor or will ambition even be higher?
Cities today concentrate more than half of the world population and more than 80% of global GDP. The underlying dynamics explaining their ever increasing importance are the result of a variety of positive externalities (thicker labor markets, knowledge spillovers, input sharing…) generating self-reinforcing effects. These rapid waves of urbanization have key implications for the production of goods and services, environmental quality and human development. The world is one of density spikes and disparities, driven by the unstoppable ascendance of metropolises. Greener and more inclusive cities should be promoted in order for them to remain livable. In this respect, public policies have an important role to play
Danish monetary policy is closely linked to ECB policy so the recent statement of Denmark’s central bank governor that he expects interest rates to remain around current negative levels in the next five to ten years is not without importance for the eurozone. Forward guidance by ECB implies that policy will only be adjusted when justified by economic conditions. The inability to be clearer in terms of time frame illustrates the complexities of inflation dynamics. Past wage increases will gradually filter through in a pick-up in inflation although low inflation, well-anchored inflation expectations and intense competition in certain sectors may very well moderate this transmission. It thus seems clear that the current policy will remain in place for a considerable time
