negative interest rates - ebi-europa.eu...2016/10/28 · nominal illusion: negative real interest...
TRANSCRIPT
Annual Global Conference of the European Banking Institute
jointly organized with the Deutsche Bundesbank Negative Interest Rates
Frankfurt, 27 October 2016
Jürgen Schaaf * Counsellor to the Executive Board European Central Bank
* Views expressed are mine and should not be attributed to the ECB.
Rubric
www.ecb.europa.eu
Legally binding: ECB’s mandate
The primary objective
of the European System
of Central Banks shall
be to maintain price
stability. Treaty on the Functioning of the European Union, Article 127 (1)
Annual Global Conference of the European Banking Institute 2
Rubric
www.ecb.europa.eu
Challenging times for Central Banks
Risks of 1. Missing the
objective 2. De-anchoring of
inflation expectations
Annual Global Conference of the European Banking Institute 3
Euro area inflation: expected and realized % per annum
Source: Eurostat Latest observation: September 2016
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2006 2008 2010 2012 2014 2016
5y-5y Break-even rate of inflation
HICP
Rubric
www.ecb.europa.eu
The rational of very low interest rates
Lowering interest rates makes saving less attractive; induces investment and consumption. Wicksellian arbitrage logic: if it < E(rt) + E(πt) ⇒ inflationary impulse πt > E(πt)
if it > E(rt) + E(πt) => disinflationary impulse πt < E(πt)
Expected inflation rate (π) and real rate of return on capital (r) important
Annual Global Conference of the European Banking Institute
4
Rubric
www.ecb.europa.eu
Long-term trend on decreasing interest rates
Annual Global Conference of the European Banking Institute 5
10-year government bond yields Annual yields (%)
Source: Bloomberg Latest observation: September 2016
DE
GB EA
US
0
2
4
6
8
10
12
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Rubric
www.ecb.europa.eu
ECB employing far reaching standard and unconventional measures
Annual Global Conference of the European Banking Institute
6
Key ECB interest rates Percent per annum
Source: ECB Latest observation: 17 October 2016
0
1
2
3
4
5
6
2000 2002 2004 2006 2008 2010 2012 2014 2016
Deposit facility
MRO rate Marginal lending facility
EONIA
Standard measures (interest rate cuts) Forex swaps Fixed rate full allotment Covered bond purchase programmes Securities Markets Programme (Very) Long-Term Refinancing Operations Lower reserve requirements Extension of collateral framework Outright Monetary Transactions Forward guidance Targeted LTROs (Expanded) Asset Purchase Programme ABSPP / PSPP / CSPP
Rubric
www.ecb.europa.eu
Nominal illusion: negative real interest rates have been a regular phenomenon in recent decades
Annual Global Conference of the European Banking Institute
7
Real remuneration of savings deposits in Germany Percentages
Sources: Deutsche Bundesbank and ECB calculations. Note: Rates are adjusted for inflation using the calendar and seasonally adjusted consumer price index for Germany (BBDP1.M.DE.Y.VPI.C.A00000.I10.L), obtained from the Bundesbank website. Rates on deposits with agreed maturities up to 12 months are taken from the Bundesbank database (series BBK01.SU0025) for the period Febr.1975-Nov.1996 (all 3-month deposits) and from the ECB MIR dataset for the period Jan. 2000 – Dec2015 (only new household deposits: MIR.M.DE.B.L22.F.R.A.2250.EUR.N). Rates on deposits with agreed maturities up to 3 months are taken from the Bundesbank database (series BBK01.SU0022) for the period Febr.1975-Jun. 2003. Gaps are due to the discontinuation of the series.
Rubric
www.ecb.europa.eu
Beware of potential negative side effects for banks and insurers …
Flattened yield curve compresses net interest income
Refinancing via deposits unprofitable unless negative interest rates are rolled over
Nominal yield promises hard too keep
Negative rates on excess liquidity entail extra costs
Annual Global Conference of the European Banking Institute
8
Rubric
www.ecb.europa.eu
… but don’t conceal the collateral benefit either
Net interest margin of European banks still positive
Fewer write-offs on loans due to improved credit quality
Capital gains on fixed-income portfolios
Annual Global Conference of the European Banking Institute
9
Euro-area large banks: net interest margin
Sources: SNL Financial and ECB calculations Note: Based on publicly available data for 27 euro area banking groups for which quarterly P&L data is available. Annualised average net interest margins. The net interest margin is calculated as net interest income over total assets.
Rubric
www.ecb.europa.eu
Financial stability risks: search yields might inflate asset price bubbles Not low nominal rates per se,
but nominal rates relative to economic dynamics matter
Most bubbles occurred in a positive nominal interest rate environment; low rates do not yet have created new large scale bubbles
The danger of bubbles is universal: rationale of macro-prudential tools
Annual Global Conference of the European Banking Institute
10
Rubric
www.ecb.europa.eu
Conclusions Negative nominal interest rates are one of many tools in the
ECB’s tool box to combat low inflation. Potential negative side effects need to be closely monitored to
avoid unintended consequences and costs outweighing the benefits.
Some banks need to rethink their business models, reduce operating costs and reduce NPLs to be resilient amid a potentially prolonged periods of low interest rate.
Annual Global Conference of the European Banking Institute
11
Rubric
Thank you for your attention
Any questions?
12