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Market bets that the global economic slowdown will hinder the ECB’s efforts to “normalize” interest rates

November 09, 2018 00:10
source: Youcai

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In the expected euro zoneinterest rateWill be raised for the first time since 2011, the market bet that the global economic slowdown will hinder the ECBinterest rateEfforts to increase significantly from the level of the crisis.

The European Central Bank is expected to end its 2.6 trillion euro currency plan by the end of this year, and the bank has hinted that interest rates will remain unchanged until the end of 2019 to support economic growth.

The market is currently digesting expectations that the European Central Bank will raise interest rates once in late 2019, raising the current deposit interest rate of minus 0.40% by 10-15 basis points, based on the overnight and forward euro unsecured weighted average overnight interest rate (EONIA) The difference between the two is judged. EONIA is the euro zonebankInter-interest rates, to some extent, reflect investors' views on the ECB's interest rate trajectory.

Huixin pointed out that the Eonia forward rate in 2020 indicates that the market expects the difference between overnight and long-term EONIA to further tighten 30 basis points, so that the deposit rate will rise to around zero.

“The market is currently digesting expectations that the deposit rate will rise to zero after two years, which is quite pessimistic.”Dutch InternationalMartin van Vliet, senior interest rate strategist at the group, said.

“The five-year long-term (Eonia) curve shows that deposit rates will climb very slowly to near, but still below, the level of 1%.”

According to Van Vliet, this suggests that investors have partially digested the expectations of the ECB's rate hike plan to abort. In other words, they believe that the neutral policy interest rate in the Eurozone – the level of interest rates that are neither restricted nor economic – may remain in negative territory.

This is significant because it means that the ECB has limited room to cut interest rates as a tool to deal with the economic slowdown, indicating that the central bank may have to turn to quantitative easing again.

On the other hand, the Fed has been raising interest rates since the end of 2015, and may raise interest rates for the fourth time this year in December.

After the global financial crisis broke out, major central banks, including the European Central Bank, pushed interest rates down to record lows or negative ranges to counter deflation and weaken the economy. The challenge they face now is to return interest rates to “normal” levels before economic growth slows again.

Huixin quoted economists as saying that the economic situation and inflation may be strong enough to allow the European Central Bank to start tightening policy cycles next year.

But what happens after that is not so clear, Italy’s turmoil, global trade tensions andGlobal stock marketFluctuations have prompted investors to postpone the European Central Bank’s first rate hike from September 2019 to December.

Recent data is disappointing, and many economists expect the ECB to cut its growth forecast in December.

  * Expectation seemsAnother rush to run*

“The expectation of the European Central Bank’s tightening policy seems to be another rush,” said Steven Major, global head of fixed income at HSBC. He added in a report that the market's digested ECB rate hike expectations indicate that ECB officials' speech has intensified their salary increases.Long andThe suspicion of rising overall inflation.

A well-received indicator of long-term inflation expectations in the euro zone, the five-year, five-year forward profit-and-loss equilibrium inflation rate has rebounded from a one-year low hit last week. However, the indicator is currently at 1.69%, still far below the ECB's inflation target of close to 2%.

It is not surprising that the European Central Bank’s start of the tightening policy cycle is very slow – the first time between the Fed’s first and second rate hikes is one year.

The term of the European Central Bank President Mario Draghi expires in October next year, which also brings some uncertainty to the timing of interest rate hikes.

The current problem for the ECB is that when the tightening policy cycle begins, it is likely that the US economy is starting to slow down – which may suggest that the Fed will suspend interest rate hikes.

“It is possible to raise interest rates twice in 2020, but the ECB’s rate hike window may be so long.” The world’s largestBond fundoneThe Pacific OceanAndrew Bosomworth, portfolio manager at Investment Management Corporation (PIMCO), said.

“The European Central Bank can act alone for a while because domestic demand is stable, but at some point in the future, as the slowdown in US economic growth drags down the slowdown in European growth, the ECB may not be able to fulfill the market's digested rate hike expectations.” Added.

(Article source: Youcai)

                (Editor: DF207)

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