ECB rates update: “Whatever it takes”
By Valentijn van Nieuwenhuijzen, head Multi-Asset at NN Investment Partners
The ECB again reduced its interest rates last week.
For some time there has been an animated debate among market watchers on whether a further lowering of interest rates, even into negative territory, will have much impact. Much of the government bonds in Europe are now trading at negative yields, which worries many investors.
In recent months, banks came under pressure again too; falling interest margins mean lower income. Concerns were raised that the nascent lending recovery in the Eurozone may be short-lived. The central bank has acknowledged these concerns and takes further actions to encourage lending.
Banks that lend more will be ‘rewarded’ by means of new Targeted Long-Term Refinancing Operations (TLTROs).
By encouraging lending and increasing credit supply, the ECB tries to boost the economy. Yet the demand side of the economy still lags behind. Consumers are spending more money and up to now, the economic recovery has been largely attributable to this increase.
Corporate investments are lagging, partly because companies see little growth prospects. On top of that, there is still excess capacity in the economy. So why would companies invest if prospects for higher growth are so limited?