ECB is treading water
“Faced with the necessary decision to wind down their bond-buying programme next year, the guardians of the euro have today taken another step sideways,” said Michael Kemmer, General Manager of the Association of German Banks. The background was evidently the strong appreciation of the single currency, which was putting a temporary dampener on prices in the eurozone. “The ECB should not attach too much weight to recent exchange-rate movements,” Kemmer added. “The euro was previously significantly undervalued. Viewed in this light, the euro’s rise is part of a gradual normalisation process, which the ECB should support with its monetary policy in the coming months.”
Kemmer pointed out that it would be desirable for this normalisation process to include a swift end to negative interest rates. Yet the ECB had repeatedly stressed that it wouldn’t change interest rates until the bond-buying programme had been terminated. This meant that, although the economy continued to be in good shape and inflation was no longer far from the ECB’s medium-term target, banks in the eurozone would be burdened with a “penalty tax” on excess liquidity until well into 2019. This was money the banks could put to better use bolstering their balance sheets or addressing the challenges of digitisation. “To provide some immediate relief, the ECB should introduce a threshold below which banks don’t have to pay negative deposit rates on excess liquidity – this is a measure the Swiss and Japanese central banks have had in place for a long time,” said Kemmer.