The ECB fears capital leaks due to negative rates

At its meeting next Thursday, the Governing Council of the ECB will begin with the revision of its monetary policy strategy, as advanced by the governor of the central bank of Austria, Robert Holzmann, and in the minutes of the previous meeting, published today, remain traces that justify the relative urgency with which the European issuer addresses this task. “Some members have stressed the need to pay attention to the possible side effects of current monetary policies”, it can be read in the document, which in addition to reaffirming the positive effects of the entity’s expansive policy, suggests the danger of generating bubbles , harmful allocations of resources or capital leaks to avoid the punishment of negative rates.

Not surprisingly, the euro zone has been immersed in zero rates since 2014 and at the last board meeting “it was suggested that the liquidity created by the Eurosystem should be carefully monitored for its impact on banking intermediation and asset markets, that is, shares, housing and other real estate, as well as capital outflows outside Europe in search of profitability ».

Already last December, Ray Dalio, the founder of Bridgewater Associates, the largest investment fund in the world, warned of the risk of an increase in interest rates and a reduction in the value of the euro after the end of monetary stimuli of the ECB, referring to a situation that can trigger a depreciation of the euro and an outflow of capital. «We must monitor the spiral of feedback: the bad conditions that are causing internal conflicts and that scare investors; when they take out their money, interest goes up, so economic conditions get worse and there is more conflict, ”said the US financier about a danger that remains a taboo in Europe.

But at its last meeting, the ECB Council not only mentioned it by name, but also raised some concern about the potential impact of negative interest rates on euro area households, noting that “the dynamics of saving and consumption also require close monitoring ». Nobody escapes that the increase in the household savings rate in the second half of 2019 is exactly the opposite of what the ECB is looking for, which also sees no satisfactory progress in the inflation target. “Regarding long-term inflation expectations, members indicated that although market expectations had stabilized, the September monetary policy package had not yet had any visible positive effect,” the text acknowledges.

The debate on the revision of the monetary strategy will take place indoors. The minutes reflect that the Council considers it “advisable” to refrain from “public discussions” and confirms that, although the available economic data remain weak, they point to “some stabilization of the euro area economy“. Risks remain low for growth, but they have become “somewhat less pronounced.”

 Given the situation, the ECB continues to maintain that a very expansive monetary policy will still be necessary for a prolonged period of time and underlines that legislators must contribute “more decisively” to the growth of the euro area and alleviate uncertainties related to trade and geopolitical tensions. In this regard, it seems that the directors judged mostly the investment efforts announced in climate protection as very positive, without expressly citing the German investment program of 54,000 million euros. The text notes that “the response to climate change could lead to a significantly higher investment“.

The document shows that the organization remains cautious with the economy in general and affirm that the data points to a dynamic of weak but stable growth. They add that there are “slight indications” that core inflation is rising, as well as that sentiment has improved thanks to the decline in global trade tensions, but that geopolitical tensions “are not conducive to reducing uncertainty.” His most reassuring message is that “the data received since the last monetary policy meeting pointed to a weak but stabilizing dynamic of the euro zone,” in a note from a textual quote by ECB chief economist Philip Lane.

 But the whole text is consistent with the concern about unwanted side effects and suggests that the supposed continuity of which Christine Lagarde came to presume the presidency of the ECB has more than one nuance. The drift that the announced «monetary strategy review» will take is still to be revealed and we do not know if Lagarde has also thought about any change in the entity’s communicative policy. .

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